There has been a sharp rise in the number of buy-to-let properties being sold in 2021. A large number of baby boomer landlords are retiring and not being replaced by younger entrepreneurs, who are put off by higher taxes and more stringent regulations.
According to research by Zoopla, the proportion of properties listed for sale that were previously on the rental market rose to 8% in September, compared to just 3% in 2018, with many landlords looking to cash in on the record house prices that have resulted from the coronavirus pandemic.
If you’re planning on selling buy-to-let (BTL) property to streamline your portfolio or retire altogether in 2022, this guide will cover everything you need to know.
How Have the Rules around Buy-to-Let Properties Changed?
For many landlords, buy-to-let properties are not as profitable as they once were. This is due to government changes to regulations and tax laws.
On 1 April 2016, the government introduced a 3% surcharge in stamp duty land tax on any properties that are additional to the owner’s primary residence, including second homes and buy-to-let properties. This 3% tax is payable in addition to the standard SDLT rates for purchasing homes above the threshold of £125 k.
Further to this, in April 2017, the government began phasing in a reduction in mortgage interest relief. Prior to this, anyone who bought a BTL property was entitled to claim tax relief on their mortgage interest payments according to their income tax band. Basic tax rate payers would benefit from a 20% tax relief, and those in the top tax bracket could claim 45% relief. This made BTL a lucrative second income for many high earners. However, since the changes have been fully implemented (April 2020), tax relief for all BTL owners is 20%, and high earning landlords, particularly those with interest-only mortgages, are feeling the pinch. The tax changes have slashed the annual net profit of renting properties for many landlords.
Is Buy-to-Let Still a Good Investment?
If you are a basic rate taxpayer, the reduction in mortgage interest relief will have had no impact on your net profit. However, buying properties to rent out is more expensive for everyone due to the 3% uplift in SDLT for additional properties.
Whether BTL represents a worthwhile investment for you will depend on more than tax laws and government regulations, though. You’ll need to consider your personal circumstances, the type of investment you want to make and what your long-term goals are.
Pros of Buy-to-Let
- You can earn a regular income, which can be considerable, depending on where your property is located
- At the same time, you’ll benefit from the property value appreciation over time
- There is a lot of flexibility and choice when investing in property; you can choose between residential and commercial sectors as well as select a specific property type to focus on
- You can take out insurance to cover some of the issues that can arise when renting property — loss of income, damage, legal costs etc.
Cons of Buy-to-Let
- Renting and managing property takes a lot of time and effort; it is not a passive income
- Recent changes to tax laws have made it less profitable for high-income earners
- The introduction of a 3% SDLT surcharge has made the initial cost of buying a BTL property considerably higher
- Any “void periods” when the property sits empty will eat into your profit margin (and you’ll need enough to cover the mortgage and council tax without the rental income)
- The cost of maintenance, repairs and refurbishment will eat into your net profit
- You must comply with relevant regulations and legislation, such as installing a smoke alarm on each floor and complying with deposit legislation. This takes time
- If property prices fall, there is a risk of getting into negative equity, and if this happens, you will lose out when selling.
Should I Sell My Buy-to-Let Property?
This depends on your personal circumstances and future plans. You should also take into account the current property market — will you be able to achieve a sale price you are happy with?
If you’re keen to continue investing but BTL has lost its appeal, research some of the alternatives, such as buying bonds and shares. Weigh up the pros and cons of each to decide which option comes out on top.
Also, be aware that just as changes have been made that negatively impact some landlords, there may be future changes that make your position as a BTL owner more favourable. Is it worth waiting to see what happens and delaying a decision for a few years? Or are you eager to sell your house fast and move on to new ventures? Only you can decide.
Can I Sell a Tenanted Buy-to Let-Property?
In short, yes. As a landlord, you can sell a BTL property as a tenanted investment or as a vacant property. However, if you choose to sell with sitting tenants, you will limit the pool of potential buyers to investors. Vacant properties may also attract a higher sale price too, depending on where it is located.
If you plan to sell your BTL as a tenanted property, make sure that you communicate with your tenants and keep them up-to-date about the sale process. Taking the time to reassure your tenants and explain what a sale could mean for them will increase the chances of them being helpful and amenable to property viewings or visits from estate agents to photograph their home, which will make your life a lot easier.
Check your tenancy agreement before steaming ahead with marketing the property. It will probably give your current tenants certain rights, for example, the right to “quiet enjoyment” of their home, which means that you cannot demand they allow people into their home for viewings or any other purpose. If there is no “break clause” in the agreement, you may need to wait until the end of their tenancy before you can take the property back and begin marketing it. If you’re not sure about how to proceed, speak to a solicitor who specialises in this area. However, the best approach is to maintain a positive relationship with your tenants so that they have no reason to make life difficult for you.
Advantages of Selling a Property with a Tenant In-Situ
- Keep earning a rental income until the sale is complete
- Investor buyers will be attracted to the prospect of having a rental income from day one
- If the sale falls through, you will still have the rental income to fall back on
- Generally, only investment buyers will be interested in a tenanted property, and they are experienced buyers with ready access to finances
- Investment purchases often complete more quickly than sales to non-commercial buyers.
Can I Sell My Buy-to-Let Property to a Family Member?
You can sell your property to whomever you choose. However, if you want to sell the property to them for below market value or gift it to them, the law can be complex and daunting for anyone but a qualified solicitor or conveyancer.
Many people choose to gift a property to a family member to reduce the amount due in inheritance tax. This tax applies to properties worth more than £325,000 (or a combined total of £650,000 for married couples). If your BTL property is valued at more than these thresholds, you could arrange to transfer ownership to a family member via a “deed of gift”, provided that you meet the following eligibility criteria:
- There are no outstanding debts secured against the property
- You, the owner, is of sound mind when you make the decisions to gift the property
- You are named as the owner in the Land Registry’s proprietorship register
- You have obtained independent legal advice before transferring the property.
Even if you meet all of these criteria, you will need a specialist legal advisor to make sure that you don’t succumb to the common pitfalls of gifting property. And remember that if you gift a property:
- You can’t reverse the decision, even if you fall out with the beneficiary
- You can’t control the future — if you gift your BTL property to a family member who subsequently goes through a divorce, an unintended beneficiary (their former spouse) could be legally entitled to a proportion of the property
- Your chosen beneficiary may lose the property, for example, if they have undisclosed debts or financial commitments.
If you choose to transfer ownership of your BTL to a family member, be prepared to relinquish all control over it, just as you would if you sold to an unknown buyer.
How Much Tax Will I Pay When I Sell a Buy-to-Let Property?
You will be liable to pay capital gains tax (CGT) when you sell a BTL property. CGT is a government tax on the profit you make when selling a property (or other assets) that has increased in value since you bought it.
Everyone has a tax-free capital gains allowance of £12,300 per year (2021 – 2022 figures), but you will need to pay CGT on any profits you make above this at a rate of 18 – 28% (depending on your tax bracket). Remember, the profit you make will be added to your income, which could bump you up into a higher tax bracket. You may be able to offset some costs, such as the stamp duty you paid when you bought the property.
It’s best to seek professional legal advice to get an accurate estimate of how much tax you will be liable to pay and how much profit you’ll make. And don’t forget, that if you have a mortgage on the BTL property, you may have to pay an early repayment penalty if your fixed rate still applies.
What Is the 36 Month Rule?
If the BTL property you are selling was previously your main residence, the period of time when you lived there is exempt from CGT together with the last 36 months of ownership (even if you did not live there in the final three years).
How Can I Sell My Buy-to-Let Property Fast?
If you want to release the capital that you have accrued in your buy-to-let property by achieving a quick house sale, House Buyer Bureau can help.
Since 2011, we have spent over £440m buying more than 2,500 properties of all types and conditions. We have the funds ready to buy your BTL and can complete the sale in as little as 7 days (or another time scale of your choosing).
Get in touch with us today and one of our house buying experts will be happy to discuss your requirements, talk you through our sale process and make you a free, no-obligation cash offer.