If you’ve decided it’s time to cut down your buy-to-let portfolio, sell your current buy-to-let and invest in a new one, or quit property investment entirely, this guide explains the key things you’ll need to consider before putting your rental property on the market.
Should you sell your buy-to-let as tenanted or vacant?
Once you’ve decided to sell up, it’s important that you talk to your tenants – who knows, they may even wish to buy the property themselves.
If this isn’t on the cards, you’ll need to decide whether you want to sell the property as a tenanted buy-to-let or a vacant home on the open market. Both options come with pros and cons:
- If you sell a tenanted property, your target market will be limited to other landlords, who might be attracted by the prospect of having rent coming in from day one. The downside to doing this is that there are lots of administrative hoops you’ll need to jump through.
- If you sell a vacant property without sitting tenants, you’ll be putting your home on the open market, which could achieve a higher selling price. Of course, you’ll need to follow the correct procedures to evict your current tenants first, and you may need to spend money sprucing up the property before you’re able to sell it.
Either way, communication and goodwill between you and your tenants are vital, as the tenants will need to agree that prospective buyers can enter and view the property (especially if this isn’t formally specified in the tenancy agreement).
The state of the property when potential buyers look round could also have a big impact on your sale, and your tenants may feel more inclined to tidy up if you have a good relationship with them.
Selling a buy-to-let property with tenants
Selling to an investor can be quicker than putting the property on the open market, as buy-to-let purchases tend to be conducted by more experienced buyers, involve fewer chains and be less emotion-based. The downside, however, is that you’ll have to deal with additional admin.
For example, you’ll need to provide the tenancy agreement to the new landlord, as well as Right to Rent records, gas safety certificates and inventories. You’ll also need to arrange to have your protected tenancy deposits transferred into the new landlord’s name.
The process isn’t hassle-free for tenants, either – they may have to undergo new referencing checks and sign updated contracts with the new landlord once the sale has completed – although it’s certainly simpler than eviction.
Selling a vacant buy-to-let property
If you want to evict your tenants before selling the property, you’ll need to adhere to the break clauses and contract terms set out in the tenancy agreement – you can’t simply serve notice whenever you wish.
If you’re determined to sell the property during the contracted period, you’ll have to come to an agreement yourself with the tenants, perhaps by providing financial compensation in return for them agreeing to move out early. Legally, the tenants hold the cards in this situation.
If you’re coming to the end of a tenancy period, have a specified break clause or your tenants are on a ‘rolling’ contract, you can serve a no-fault eviction using a Section 21 notice. This will give them two months’ notice before they have to vacate the property.
Remember to factor in some decorating time if you want to spruce up the property before putting it on the market, but if you have a buy-to-let mortgage, bear in mind the loss of rental income during this period.
Capital gains tax when selling a buy-to-let property
Buy-to-let properties are subject to capital gains tax (CGT).
This is charged at a rate of 28% (for higher-rate taxpayers) or 18% (basic-rate taxpayers) on any growth in value that the property has enjoyed. If you’re a basic rate taxpayer, bear in mind that the gain will be added to your income, so this could push you into to higher-rate band.
Everyone has a tax-free capital gains allowance of £12,300 per year in 2020-21, so you’ll only need to pay CGT on profits above this threshold.
It’s also possible to offset some costs, such as what you paid out for stamp duty and conveyancing when you bought the property and any charges associated with selling it (including estate agent fees). You should also be able to offset any capital improvements you’ve made to the property against your CGT bill.
You’re not allowed to deduct outgoings on the upkeep of the property or mortgage interest.
Selling a buy-to-let property: mortgage implications
When preparing your exit strategy, it’s important to consider the mortgage implications of selling your buy-to-let property.
This is particularly important if you’ve taken out a fixed-rate mortgage, where your repayments are set for a specific number of years (usually two or five, though 10-year deals are becoming more common in the buy-to-let sector).
Longer-term fixed-rate deals often come with hefty early repayment charges. For example, on a five-year fix, the repayment charge might be as much as 5% in the first year, before dropping to 4%, 3%, 2% and 1% each year until the end of the introductory period.
Not all products have such high early repayment charges, so check the specifics of your mortgage before deciding when to sell.
- Find out more: Buy-to-Let Mortgages
BUY-TO-LET: WHAT YOU NEED TO KNOW
With interest rates at record lows and house prices rising, you may be considering investing in a buy-to-let property. But before you take the plunge, it’s important to understand the costs, risks and rewards involved in becoming a landlord.
Schemes such as the stamp duty holiday can make a buy-to-let investment more attractive in the near-term. But it’s important to evaluate all aspects of your proposed investment. The key factor being where you decide to purchase a property.
This guide outlines exactly what you need to know to make your decision:
SETTING UP AN SPV LIMITED COMPANY
Buy to let lenders who offer mortgages to limited companies usually require the limited company to be an SPV (Special Purpose Vehicle).
In the mortgage world, a Special Purpose Vehicle limited company is a company which is set up just to hold property and do nothing else. Buy to let lenders offering mortgages to corporate vehicles mostly prefer SPVs to trading limited companies because they are easier and quicker to understand and underwrite, and are perceived as being lower risk.
Many more landlords are now purchasing rental property via an SPV limited company because it can be more tax efficient now that the changes to tax relief on finance costs for individual landlords have been phased in.
As you can imagine, we now frequently get asked how one goes about setting up an SPV. The honest answer is that it is very simple and is no different to setting up any other company.
You can either ask your accountant or simply go to the Companies House website and set the company up yourself. An SPV limited company costs £12 to set up, and if done online, it will take just a few minutes to arrange. As long as you intend to use the company just for property letting going forward, this would be an SPV – there is nothing more complicated to it!
For those who already have companies and are wondering whether this would meet the SPV criteria, here is what the lenders like to see:
• SIC code for letting property
• No sign of any revenue through the company of anything other than letting property
If the company has traded in another field in the past, some of the lenders will still lend to the company as long as this is historic, the company has the right SIC code and the accountant can confirm the company will only be letting property going forwards.
What is a SIC code?
The Standard Industrial Classification of Economic Activities (SIC) is used to classify business establishments by the type of economic activity in which they are engaged.
How do you get a SIC code?
You will need a SIC code when filing the SPV’s Annual Return with Companies House. To choose a SIC code, use the official Condensed SIC list on the Gov.uk website. Most investors require a SIC code from Section L: Real estate activities.
Buy to let mortgages for non-SPV limited companies
If your company trades in something other than property you can still get a buy to let mortgage; however, your options are restricted to fewer specialist lenders.
PERSONAL OR LTD COMPANY OWNERSHIP OF BUY TO LET PROPERTY?
(This guide has been produced for information purposes only. As a mortgage broker, we’re not able to offer tax advice).
Income tax relief on buy to let mortgage interest has been restricted but is it more tax efficient and financially better all round to operate your portfolio using a limited company?
If you’re a residential landlord, the main finance cost is the interest you pay on the buy to let mortgage but it may also include interest on loans to buy furnishings and any fees incurred when taking on these mortgages and loans.
As usual, the information on Gov.uk is typically vague about what is regarded as a finance costs, so please do make sure you take professional advice or ask your tax office for clarification.
From 6 April 2020, if you are a residential landlord and you own your rental property personally (i,e, not within a limited company), you will not be able to deduct the finance costs from your property income when calculating your taxable profit. Instead, you will just receive a basic rate of tax reduction on the finance costs from your income tax liability.
Because this is such a game-changer for landlords, the new regime was phased in over four years on the following basis:
- Tax year 2017/18: You can deduct 75% of your finance costs from property income. The remaining 25% can be claimed as a basic rate reduction from your income tax liability.
- Tax year 2018/19: You can deduct 50% of your finance costs from property income. The remaining 50% can be claimed as a basic rate reduction from your income tax liability.
- Tax year 2019/20: You can deduct 25% of your finance costs from property income. The remaining 75% can be claimed as a basic rate reduction from your income tax liability.
- Tax year 2020/21: All financing costs you incur can be claimed as a basic rate reduction from your income tax liability.
Why not transfer all the properties you already own into a limited company?
Transferring is not a legal option; the properties must be sold at the market value which means some or all of the following additional costs:
- Stamp Duty Land Tax at the higher rate will be payable on the purchase by the limited company, even it is your first property purchase by the company.
- Capital Gains Tax owed by you personally when you sell the property
- Early Repayment Charges (ERCs) if you are still tied into your existing buy to let mortgage.
- Finance costs incurred by the limited company when taking out a new buy to let mortgage.
It’s worth reiterating that everybody’s circumstances are unique, so do seek the advice of a qualified accountant to find out if incorporating your portfolio is the best strategy for you.
Should you make new purchases in a limited company?
Your accountant will be able to tell you if it makes sense for you to make all new purchases of buy to let property through a limited company. If it is, here are a few pointers to bear in mind.
Choice of lenders and mortgages for limited companies
There are not as many lenders in the Ltd company market as what there are in the personal mortgage market however there is still a very good selection of lenders to choose from.
Are buy to let mortgage rates higher for limited companies?
Generally – Yes! The very cheapest buy to let rates available in the market are generally not available to limited companies.
Is it complicated to set up a Limited Company?
No. It’s quick and easy and can be done online.
Can a newly established company get a buy to let mortgage?
Yes! A new company is not a problem as long as you are prepared to provide a personal guarantee for the loan.
Will the lender take a fixed and floating charge or debenture over the company?
Yes and no! Generally speaking these aren’t required on SPV limited companies but they may be if you buy the property using a trading business rather than an SPV.
Will you need to earn a minimum annual income?
Yes and no! Some lenders want to see proof of income of over £25k per annum. This can be salary, dividends, property income or combination of all of them. Different lenders will accept different income amounts and sources so all circumstances can be accommodated – usually! New companies won’t have any trading history or income so lenders will base their underwriting against your personal income.
Will I need to be an experienced landlord to borrow via a limited company?
If you want to jump straight into the HMO market without the experience of being a landlord, your borrowing options will be restricted. The same goes for other, more complex properties like blocks of flats (often referred to a multi-unit freehold blocks), mixed used and commercial premises. Don’t get me wrong, it’s not impossible to find a lender but your application will need to be stronger in other areas to compensate.
Deposit – including directors’ loans, inter-company loans, gifted deposits, etc.
This is an area which it gets a little complicated as to what is acceptable or not but the fundamentals are, as long as you can provide evidence of the source of the funds, and they are legitimate, then lenders will be sensible. A common misconception is that you cannot raise money from one property to form the deposit for a BTL on a different property. Wrong! This is actually one of the most common ways of a raising a deposit, often against your home or on another BTL property. Evidence of the source of funds can very easily be provided, usually with bank statements showing the deposit from another lender.
Are lenders’ borrowing criteria more restricted for limited companies?
Not really but they will be inquisitive about:
- The total number of properties you own – both personally and in a limited company structure
- The number of directors on the application – usually there is a maximum of four
- How many shareholders the company has – sometimes people like to add children as shareholders which some lenders don’t like
Regardless of whether you are applying personally or via a limited company, lenders will be inquisitive about your credit history, the property type, the location and the loan to value and for a limited company this will relate to all of the directors of the company – and potentially all of the shareholders as well.