Selling rental property tax advice: How to plan your exit11th August 2017 | Posted in: Personal Tax, Properties, Property Investment, Regulations
The importance of having a plan, disposing of properties and tax implications are discussed in this video. How to mitigate both Capital Gains Tax and Inheritance is also reviewed. The tax position of selling a property which has been both the owner’s principal private residence and an investment property is also mentioned.
Full text transcript below:-
David Court: Selling and disposing of properties, if you have a portfolio of properties that you’re intending, from my experience, at the moment there are few properties on the market. I think certainly the prices are driven by that. There are always going to be individuals who, for one reason or another, need to get rid of something and perhaps to change or adjust there, because of their own circumstances. Have you any thoughts on that?
David Miller: Yes, I think it’s an interesting point. As I said earlier, I think everyone needs a plan. Not only a plan to enter the market, a plan to manage the property portfolio, but also a plan to exit the market. In our experience, we tend to find some experienced investors who reach a stage in their life when other taxes, as opposed to income tax, become quite important. Things like inheritance tax.
You might find a couple with a fairly large buy-to-let portfolio are faced with a potentially large inheritance tax bill facing them, so they start looking to diversify their assets and not necessarily sell them on the open market. They could do that, but they might wish to transfer them, say, to their children. I think in certain circumstances a property can be quite a flexible asset in that if there’s a large amount of capital gain within a property a husband and wife can pass the property to their children in stages thereby utilising annual exemptions for capital gains tax purposes. We’ve got some clients who’ve transferred properties to their kids over four or five years and done it very, very successfully.
There’s other taxes, obviously, which have to be taken into account when you’re making a gift such as that to your children. The seven year rule applies for what’s known as a potentially exempt transfer, so one needs to be mindful of that. I think it’s just a case of having a plan to exit the market or a plan to generally transfer properties down the line.
Murdo McHardy: When you talk about transferring property like that, David, does that become more complicated, I guess, when there’s lending on the properties themselves?
David Miller: It becomes a lot harder when there is lending.
Murdo McHardy: In the parent’s name, for example, and the children then have to find a way to maybe finance that?
David Miller: Absolutely, I’m thinking of somebody who’s paid off their borrowings. They’re in their 60s or 70s. They’re faced with a potentially large inheritance tax bill if they don’t do anything and they might start to try and pass properties down to the kids. Of course there are so many children now who are so much older than we were when they enter the property market. A lot of parents are trying to pass properties down to their kids to help them get on the market.
David Court: Can I ask why it’s a problem with lending?
Murdo McHardy: Generally speaking, when you’ve got lending against a property, it really needs to be in the same name as the owner. If you’ve got a situation where the parents own the property and then part of the property is owned by the children, that becomes a lot more complicated from a lending point of view. It’s not to say it can’t be done. It just means that it’s not the norm in the buy-to-let lending market and you maybe need to think about a slightly more flexible approach to how you structure the lending. You need to think about these things, but as David says, it’s mainly I guess in that scenario for people where there isn’t lending on the property that you’re looking at that type of scenario for people a bit older age. It’s not to say it can’t be done. It’s just it’s not the mainstream, and a bit more thought maybe needs to go into it.
Rob Trotter: Generally speaking, what I find is there’s two different people that are exiting the market. There’s a couple who had a property and their plans have changed. They had left Edinburgh and thought, “We’re going to keep this for a long term investment,” and suddenly their life situations dictates that actually they need the equity out. It’s two people that own it, invariably, maybe with no children. They sell up and they do something else with it. Or, it’s the more mature investor who has had that property for a considerable amount of time, and as you say, it’s been paid off and they’re now just looking to exit the market altogether.
The success at which you’re going to achieve a sale will be largely dictated by how wisely you bought that property. If you’ve chosen wisely and you’ve bought a property, which in the current climate is quite difficult to buy, the chances are when you come to sell it, there’ll be lots of people looking to buy it. These premium properties are hard to buy, quicker to sell. The properties that are sometimes more troublesome is when investors targeted the higher yielding properties, which tend to be in the less prime areas, easier to pick, but there’s some considerations to be made when selling them. Then, of course, there’s a consideration of you’ve got a tenant living in your property.
David Court: What problems does that bring?
Rob Trotter: Well, I think first and foremost, is if you don’t have control over how often you can get in to do a viewing, then that limits physically bringing people, parties to the property to view it and look round it. Then, of course, you lose control of presentation. Presentation is so important. You’ve got to make the property look good to achieve the maximum sales value. You’ve also got to appreciate that the tenant isn’t going to spend hours before every viewing tidying up making sure it looks pristine, as you would if you were the home owner. It’s inconvenient for a tenant. I think if at all possible you seek vacant repossession of your property. You get it tarted up, for want of a better expression. Get it looking its absolute best and put it on the open market. Actually the concern of the loss of income of not having rent coming whilst you’re selling it, you should actually get the benefit of a better sales price ultimately, which should compensate you well.
Murdo McHardy: What about the situation where it’s a property that might take a bit longer to sell, that isn’t in a prime location that you think might take three or four months? Obviously three or four months with a mortgage to pay potentially and no rental income, that’s a bit of a drain for a landlord. What would your thinking be around that?
Rob Trotter: Well, it’s quite difficult to manage that. If, as soon as you told your tenant that you’re effectively going to sell the property, that unsettles them. If it takes two months, three months, four months, to have that burden hanging over the tenant knowing at some point I’m going to be given notice. Most tenants would say, “I’m not going to live in that situation, so I’m going to give notice and I’m going to move out. I’ll drive that termination.” That’s quite difficult to manage. It is quite troublesome.
Incentivising your tenant is quite sensible. Offer them some sort of incentive for staying on for the period in which you’re marketing it so it’s in their best interest to stay. It’s in their best interest to cooperate. Reassure them of a minimum notice period that when you do achieve a sale, you’ll get plenty of warning so you’ll have time to move on and move out.
David Court: The key to that is a good agent will help you to choose what the best policy, to choose the right property to sell and so on.
Rob Trotter: Yes, yeah. I think have a realistic timescale and a good sales agent will be able to tell you, “We believe this property will sell over this period of time.” That helps for your planning. Certainly having witnessed our sales team, the frustrations caused by trying to sell a property when there’s a tenant in place, there restrictions that puts in place are inhibitive.
David Miller: One very interesting disposal situation, which is actually quite common, is a property which the landlord originally used as their main house, the principal private residence, and then they decide to rent it out. There are currently very attractive benefits available to somebody when they sell a house in that situation, in terms of additional relief. A relief called letting relief, which can take up to £40,000 out of the gain. Again, it’s very, very important to take advice is you’re considering selling a property which has been both your main house and an investment property.
Murdo McHardy: I think back to what you were saying as well, David, about having a plan for all this, is crucial because even from a finance point of view, if people have mortgages against the properties that they own and are renting out, they just need to make sure that they plan their financing in advance. What you don’t want to do is sell the portfolio in the order where you maybe still have penalties that you might have to pay to repay the borrower. Transitioning away from that or selling in the right order or having a plan, as you describe it, is absolutely crucial.
David Court: That’s the situation where you’re talking of clients who’ve had fixed mortgages or fixed rate-
Murdo McHardy: Just any type of mortgage where there are penalties involved. It could be a fixed rate mortgage. It could be a tracker type deal, some variable type mortgages with high street lenders have penalties in there. You just need to be aware of these things. Don’t want there to be a sting in the tail when you pay the mortgage off at having sold the property, then you maybe get hit with fees that you weren’t expecting.
David Court: Somebody has to look careful at your portfolio and then seek advice on how best to sell it and whether it should be vacant.