Which is best – investing your money in a property or a pension? In today’s BusinessDesk, a tax accountant shares some thoughts on the dilemma.
According to a recent report from the property website, Rightmove, there’s been a notable surge in interest in British rental properties. The data revealed that on average, each rental property is attracting requests from 25 prospective tenants, a significant rise from just five people per property within the last five months. Simultaneously, the average rent asked for new lets outside London has climbed to a record £1,278 per month.
With such high demand and a lack of supply for rental properties, agents are calling the situation “nothing short of crazy”. As a result, investing in a buy-to-let property might seem like the clear choice for accumulating a retirement fund.
The Past Golden Days of Property Investment
Historically, turning into a residential landlord was deemed a reliable investment option. This perception was buttressed by consistent capital growth through ever-increasing property values, low borrowing costs and a steady rental market that provided decent yields and prospects for long-term profit.
However, this favourable scenario seems to be history now, due to rising interest rates and stubborn inflation levels, significantly influenced by external market forces.
The Risk Element in Property Investment
In stark contrast to the many years of extraordinary growth in the housing market, recent data shows a dramatic shift. UK house prices have experienced their fastest annual decline in 14 years in September, driven by higher mortgage costs leading to a sixth consecutive monthly dip.
For anyone considering venturing into the buy-to-let sector, there’s the crucial matter of substantial responsibilities, including maintenance, repairs, and insurance to worry about. Additionally, if you’re renting a Houses in Multiple Occupation (HMO) – a property shared by at least three people from different households – you need a specialist mortgage.
It is also essential to verify that your tenants have the legal right to live in the UK, which is typically tied to their legal residential status. Plus, the government’s new Renters (Reform) Bill, unveiled earlier this year, could further complicate matters.
The Financial & Legal Side of Property Investment
There are other financial liabilities attached to buying an investment property that you need to be aware of. For one, purchasing a buy-to-let or secondary property requires you to pay a higher Stamp Duty Land Tax. If you’re a higher rate taxpayer, you’ll be subject to a 28% Capital Gains Tax (CGT) on any profit you make when you sell the property.
Furthermore, any income from a buy-to-let property must be declared as part of a self-assessment tax return, with the extra income taxed at your individual rate. The implementation of tax credits also means that landlords can no longer deduct any mortgage interest from their rental income when working out their taxable profit; however, landlords can receive a 20% tax relief on mortgage interest payments.
Forming a limited company can be a good move for many property investors. This arrangement allows for all mortgage interest to be offset against rental income, possibly leading to substantial savings over the lifetime of the mortgage.
Pensions – The Old Reliable
While you can’t directly invest in residential property through pension funds, they do allow you to venture into commercial property and shares. Some of the main perks of using pensions as a long-term investment plan include tax relief on contributions, tax-free growth, and Inheritance Tax exemptions.
The big difference between pensions and property investment, though, is that pension funds can only be accessed once the holder reaches the age of 55.
Just like with property investment, there’s a risk that values can shrink, mostly because pensions are generally invested in stocks and shares, and can thus be greatly swayed by economic factors.
Weighing the Options
It’s clear that both investing in buy-to-let property and putting money into pension funds have their fair share of opportunities and risk factors. As a would-be investor or retiree, you must take into account your individual circumstances, keeping an eye on your long-term retirement goals.
Given the complex nature of these investments and the potential consequences, it’s always a wise idea to enlist the help of a qualified financial advisor and tax adviser. Their expert guidance will assist you to properly plan your future and secure your peace of mind.