The End of Buy-to-Let? Here Are Some Alternatives10th January 2016
The Government is apparently waging a war against buy-to-let. If you are a landlord, you have certainly not missed the Chancellor’s announcements of two potentially very costly and painful measures. First it was the reduction of mortgage interest tax relief announced in summer. That was followed by the new 3 percentage point surcharge on buy-to-let stamp duty which appeared in the Autumn Statement. The tax relief cuts will be phased in gradually in 2017-2020, while the stamp duty surcharge comes into effect on 1 April 2016.
For now let’s put aside the questions of whether the changes are fair or whether they will help the British property market and the economy. One thing is clear: more money for the HMRC and less money left for the landlord. If you have relied on buy-to-let property as the best way to save for retirement, you may need to reconsider your strategy. The following are some of the possible alternatives.
1. Take Advantage of Pension Tax Benefits
Pensions are the primary retirement planning vehicle and as such they should never be neglected, because they come with substantial tax benefits and other advantages. Not all pension schemes are created equal and the particular benefits and tax reliefs depend on your particular circumstances. Moreover, like buy-to-let, pensions have been subject to significant changes in the last few years (and the years to come). Talk to your adviser to make sure you understand all the rules and complexities and their implications to your current and future tax position.
2. Maximise Your ISA Allowance
An ISA (Individual Savings Account) is a tax wrapper which allows individuals to invest a limited amount (currently £15,240) every year in stocks, bonds, cash or funds without having to pay tax on the resulting income (such as dividends or interest) and capital gains (when you sell the assets in the future). This can become very powerful – it adds up and grows over the years (there are a number of “ISA millionaires” in the UK).
The key to ISA success is to maximise your allowance every tax year, which also includes your spouse – that is over £30,000 per year for a couple; and there are also smaller allowances for children under “Junior ISA”. Also keep an eye on fees (they are often lower if you buy the same stocks or funds regularly, e.g. every month) and interest rates (unsurprisingly, banks like to lure ISA savers with high interest rates, which they cut after 12 months).
3. Invest in Stocks and Bonds Directly
If your income is high enough and you still have money left to invest after you have maximised your pension contributions and ISA allowances, consider buying stocks, bonds or funds directly. These can be quite tax efficient even outside a pension or ISA wrapper, at least up to a certain amount. There are various allowances for savings income and capital gains, which you can use to draw tax-free income in retirement.
4. Have a Look at Alternative Investments
If your income is even higher, you may have access to hedge funds and other alternative assets, which can provide interesting opportunities for return enhancement, risk management and tax optimization. Alternative investments are a diverse set, including quant trading strategies, latest startup ventures, commodities, art, land in exotic locations and much more. It can be difficult for an inexperienced investor to distinguish the true gems from the false promises. Therefore it is very important to get advice from the right provider, ideally a qualified and long-established firm. If something looks too good to be true, it probably is.
5. Don’t Entirely Ignore Property
The last point is not really an alternative. Although the changes will make buy-to-let generally less attractive, it does not necessarily mean that it is no longer a profitable option. Moreover, even when you decide against direct investment in buy-to-let property, there are other ways to get exposure to real estate, which may be easier to manage and more tax efficient. For instance, you can hold various real estate funds within your pension plan or ISA.
Do Not Put All Your Eggs in One Basket
While we always warn against excessive complexity, which only leads to higher costs and other problems, it is obvious that putting all your eggs in one basket (such as the buy-to-let basket) is rarely a good idea. Although the buy-to-let changes might make you believe otherwise, the Government does want people to take the initiative and save for retirement, using various tax incentives and other benefits to motivate them. The frequent changes in these incentives can feel a bit frustrating at times, but make sure you always understand them, know your options and use them to full advantage.