Landlords now have to pay an additional 3pc stamp duty compared with what is taken from homeowners.
For example, if a landlord bought a main residence for £100,000, they would pay no stamp duty as it is under the £125,000 limit. However, as a second home, a landlord would pay £3,000.
On top of this, landlords have legal and survey fees and may well have to make changes to the property, such as upgrade the fuse box and electrics or buy a new boiler if the current one doesn’t pass required gas safety standards.
Upgrades to make a property health-and-safety-compliant for tenants to live in can cost a few thousand pounds, or tens of thousands if you let rooms and need a house in multiple occupation (HMO) licence.
This means that, for example, when investing £100,000 in buy-to-let, by the time costs are incurred the actual investment may have reduced to just £94,000.
And if buying a property with cash, just to retain its value in real terms it needs to grow each year on average by approximately 3pc as does your rent to keep up with inflation.
Then the value needs to increase even further to cover the costs of exiting the investment when selling, in the form of legal and agent fees, and capital gains tax (CGT) incurred on any growth in capital value over and above relief available.
CGT is charged at 18pc for lower-rate taxpayers and 28pc for those on higher rate. However, for financial investment CGT is just 10pc and 18pc respectively.
There is no denying that buy-to-let can now be classed as an expensive investment to purchase and exit from compared with other ways of investing, especially for a pension. Other investments may cost very little, if anything, to invest in and may indeed even attract additional tax relief.
However, this doesn’t mean that buy-to-let cannot work for landlords as part of their pension plan. Property, unlike stocks and shares, can be bought with a deposit, so buy-to-let investors can “gear” their investment.
If prices rise, this means, for example, three properties worth £100,000 each can be bought with a cash investment of £100,000 as opposed to just investing the £100,000.
This allows a benefit from growth of assets worth £300,000, meaning just a 10pc increase in property prices could potentially deliver an exceptional return compared with increases in financial markets on a cash investment of £100,000.
It is also possible to buy properties at a “true” discount. For example, a seller who needs to move on due to changes in their personal circumstances may be willing to sell for tens of thousands of pounds less, or if a property can’t be bought with a generic mortgage but cash only – if it has subsidence or a sitting tenant for example – again it may be possible to purchase the property for less than it’s worth, sort out the problem and instantly see a gain in value more than a standard financial investment could offer.
However, when looking to invest for a pension, it is important to understand all the options that are available and assess whether property should be part of a plan, or whether it is risking too much by relying on property to deliver as a whole pension plan.
Before making any decisions on pension planning, even if looking at investing in property, it is best to speak to an independent financial adviser who gives regulated advice to check that plans will deliver the pension that is hoped for.