Estate Planning Considerations for Buy to Let Investors
This is the first in a two-part series that looks at the estate planning concerns of buy to let investors - and some of the many available solutions.
Investing in property to let is a bold decision, whether you are investing in a single residential let or a large mixed portfolio of residential and business properties. The long-term rewards for yourself and your family, both in terms of income and capital, are potentially generous. However, the day to day challenges are undeniable. At the moment, those challenges are growing, particularly with ever-more-stringent mortgage lending criteria and gruelling new tax rules that are looming ever closer.
But let’s stop for a moment, take the long view and consider some bigger questions.
- What - or who - are you investing for in the long term?
- What would happen to your portfolio if something happened to you?
- Who’d look after your investment? Who’d liaise with your mortgage company? Who’d take care of your tenants?
- Most important of all – if something happened to you, would your portfolio give your family the security they need?
This is the first of a two-part series in which I look at the issues that particularly affect buy to let investors. In this part, I look at the problems and their potential solutions. And in the next part, I’ll share a case study with you, so you can see how some of these solutions work in practice.
First Principles: what, or who, are you investing for?
I’ve lots of conversations with many buy to let investors, and what they tell me is that their aims are broadly threefold:
- To provide income for themselves and their other half, either right now or in later life, as their “pension”.
- To provide security, by building up capital in a traditionally safe and prudent investment.
- To provide income and capital that is long-lasting, and gives their family financial security across decades and even generations.
Whatever your long-term aims, sensible planning can prevent those plans being derailed.
The dreaded Inheritance Tax
First the good news: it’s the equity in your portfolio, not the headline market value of the properties, that counts for Inheritance Tax purposes. So if your portfolio's equity is modest in value, Inheritance Tax may not be an issue for you at all.
If your overall assets, including the equity in your portfolio, amount to £325,000 or less – or £650,000 or less between you, if you are a married couple – your estate won’t be liable to Inheritance Tax.
If, however, your portfolio's value has taken you over that threshold, then Inheritance Tax is a challenge that you will need to plan for in mid-life to prevent difficulties for your family after you’re gone.
The problem with Inheritance Tax is that it has to be paid up-front, within six months of your death, and before your family can receive their inheritance. If your wealth is tied up in bricks and mortar, meeting the Inheritance Tax liability can be an additional headache that a grieving family can well do without.
How you address this problem depends on your individual circumstances, the nature of your portfolio, the attitude of your mortgage company, and the way other capital taxes such as Stamp Duty and Capital Gains Tax apply to you.
Ways of addressing your Inheritance Tax liability include:-
- Making changes to the way your portfolio is owned, so as to take the properties outside your estate for Inheritance Tax purposes. Although quite costly in the short term, this strategy can be very cost-effective in the long term. But it requires careful planning and detailed input from an accountant as to the overall tax consequences. And your mortgage company’s agreement is essential, so if your properties are mortgaged, this may not be an available solution for you.
- Making a long-term savings plan to set aside the liquid cash to meet the liability. This is by far the most straightforward solution, but it’s only available if you’re fortunate enough to have access to plentiful liquid cash.
- Using life insurance to meet the lability. With the right financial advice, you can take out a life insurance policy that pays your executors a sum of money to cover your liability. The cost of life insurance is particularly low at the moment, but if you’re older or have particular health issues, the cost can still be quite prohibitive.
It’s useful to find out what your liability is likely to be, and then get professional advice as to the pro’s and con’s of the options available, so that you can choose the solution that suits you best.
Planning for Retirement and Later Life
Your portfolio may be your pension plan, or part of it at least. But, unlike a traditional pension fund, a property portfolio is rarely a passive income. Even if you have outsourced day to day management to a letting agent, issues will come up that demand your attention.
We all know that, the older we get, the more vulnerable we become to ill health. There may come a time when looking after your portfolio is just too much for you. And what if you suffer a serious injury or critical illness in mid-life, that takes away your ability to manage your own affairs?
A useful protective measure is to make and register a Lasting Power of Attorney for Property and Financial Affairs, taking action in mid-life to nominate at least one person to speak up for you, and make decisions for you, if ever you are unable to.
Choosing the right attorney is crucial. It has to be someone you trust to have your best interests at heart, and someone who is up to the challenge of looking after your portfolio for you. Couples often nominate each other, with back-up from their adult children, or from a professional colleague like their accountant.
Planning for After You’re Gone
If your portfolio is your way of providing long term security for successive generations of your family, then the way your will is constructed is a crucial issue.
Your first consideration is choice of executor. You need executors who clearly understand what your long term aims are, who you can trust to uphold those aims. They are likely to be the very same people you would choose as Attorneys when making your LPA.
The next consideration is who you want to provide for and how. You can approach this in a very straightforward way, by making a traditional will that leaves your portfolio directly to the person or people of your choice. Alternatively, you can incorporate a great deal of protection, by making a will that creates a family trust which comes into being as soon as you’re gone, and protects your assets for the benefit of successive generations of your family for decades into the future.
Planning for the Cost of Probate
If you have multiple properties in your name, administering your estate after you are gone is going to be a complex task, which your family may struggle to accomplish without legal advice. But fear of incurring excessive legal expense often stops families from getting the legal advice they really need.
One useful solution a Probate Guarantee. This will give your family direct access to the legal support they need, at a reduced hourly rate, with the overall cost capped at 1.5% of the value of your estate. So however complicated your estate may be, 98.5% of your estate is protected from being eroded by legal expense.
Where to from here?
No two buy to let investors are the same, and there are no one-size-fits-all solutions. However, with thoughtful planning and intelligent advice, you can keep your investment safe and productive for the long term, whatever happens. For more specific guidance about your portfolio and how best to protect it, fell free to get in touch, either by calling 0151 601 5399 or filling in the contact form below.
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