Buy-to-let property versus pensions

December 14, 2015

As buy-to-let investors suffer major blows, David Smith of Tilney Bestinvest looks at the advantages of concentrating on your pension.


The Chancellor has had buy-to-let property investors in his cross hairs this year, announcing plans to remove the ability to offset mortgage interest from rental income in his July Budget and last week slapping an additional 3 per cent Stamp Duty levy on buy-to-let investments. These measures together reduce the attractions of buy-to-let investing.

Brits have a longstanding love affair with residential property, so with the advent of pension freedoms there has been an expectation that some pension savers might scramble to release the value of their pots to fund the purchase of investment property. However in so doing, potentially suffering tax bills of up to 60 per cent to buy their ‘perceived’ preferred retirement vehicle.

Similarly, those approaching retirement would often consider using accumulated savings to buy a second home rather than consider investing a lump sum into a pension to boost their benefits in retirement. Indeed, research carried out by Tilney Bestinvest earlier this year showed that 38 per cent of all respondents considered buy-to-let as an attractive long term investment, whilst only 34 per cent believed a pension to be so.

Drawing down a pension fund in full to purchase a buy-to-let was already a highly contentious strategy, now, with the additional stamp duty tax levy, there is even greater evidence to avoid this plan of action like the plague. The impact of the additional stamp duty is unknown, but a 3 per cent hike on the cost of buying a second home (with effect from April 2016) is likely to not only reduce profit margins on subsequent sales but also dampen buyers’ demand, thus potentially reducing property values.

It could be that buy-to-let investors may look to simply pass on the additional cost by increasing rents, but there is a very strong argument that rents, especially in London, have already pushed affordability to the limit.

To add insult to injury, it was announced in the Summer Budget that with effect from the 2017/18 tax-year the ability to offset buy-to-let mortgage interest against rental income for tax purposes will gradually reduce, with no offset from April 2020 onwards; instead a simple relief of 20 per cent of the mortgage costs will be offered as a tax reducer.

Whilst on the face of it this might seem like a small change, it will in fact result in an additional tax bill of many thousands of pounds for higher rate tax payers. The impact will be even more serious if, as anticipated, interest rates are significantly higher by this time – a proverbial ‘double-whammy’.

As a result, it seems there is now an even greater argument for those approaching retirement to retain their pensions to fund their retirement – especially so while generous tax reliefs on contributions for higher and additional rate tax payers remain available, the days of which could be numbered given the Government is currently consulting on their future. For every £80 you put in to a pension plan, you potentially get a further £20 put in by the Government – a 25 per cent immediate uplift in value.

Furthermore, with the potential for higher rate tax relief, tax efficient withdrawals and with pensions, unlike property, not forming part of your Estate for Inheritance Tax (a further potential 40 per cent saving) purposes, it would seem that pensions are the clear victor of this particular battle.

However, whilst the status quo for pension tax relief remains, it is almost certain that it will change in the near future; tax relief on pension contributions is likely to be reduced or indeed withdrawn altogether, should the Chancellor get his way. That is why it is a now or never situation with pensions; contribute before the budget next year, to ensure you get maximum relief."

David Smith is director of financial planning at Tilney Bestinvest

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