Selling a buy-to-let property
According to recent research, more than a third of UK landlords are considering selling a buy-to-let property. Of those who are intending to sell up, 61 percent said they felt an increase in regulation and taxation left them with little option.
Of course, that’s not the only reason you might want to sell a rental property. Maybe you’ve decided you no longer want the additional responsibility that being a landlord brings? Perhaps you want to access the cash tied up in a rental property? Maybe you’re having a difficult time with problem tenants?
Whatever your motivation, if you’re a landlord who’s considering selling a buy-to-let property, this guide is for you.
Why sell a buy-to-let property?
With record-low interest rates and record-high rental income, you might think buy-to-let property should be an attractive investment opportunity. For some landlords it still is. However, changes over the last few years have left many investors keen to offload either some or all of their buy-to-let properties.
So, what’s changed?
Until April 2017, landlords were able to claim tax relief on the mortgage interest they paid on their properties. Basic rate taxpayers were eligible for 20 per cent tax relief, and those in the higher tax brackets could claim 40-45 per cent tax relief. The loss of tax relief has had an impact on the financial viability of many buy-to-let properties.
In September 2017, a new financial ruling demanded that lenders consider a landlord’s full portfolio of properties when assessing lending suitability. The ruling applied to any landlord with four or more properties. The suggestion is that mortgage arrears are higher when landlords own more properties, and therefore lending is more risky. Landlords deemed ‘higher risk’ are only offered higher interest buy-to-let mortgage products.
In April 2016, the government introduced changes that meant buy-to-let investors, and anyone else with more than one property, were required to pay an additional three per cent stamp duty.
The changes had an immediate impact on buy-to-let affordability. According to the Office of National Statistics (ONS), the number of property sales that completed in April 2016 was 19.6 per cent lower than the five-year average for the month. Buy-to-let mortgages also plummeted from 30 per cent of all mortgage completions to just eight per cent.
Other common pitfalls for landlords
Other reasons a landlord may consider selling include:
- Bad tenants: Even with background checks and references, finding good tenants can be difficult. Having tenants who don’t look after the property or who aren’t dependable in terms of rent payment can be incredibly stressful, and the process of getting a bad tenant out of your property can be challenging and time consuming.
- Difficulty re-mortgaging: New rules in buy-to-let mortgage finance have resulted in some buy-to-let landlords struggling to secure a competitive mortgage deal when their initial fixed period comes to an end. With changes to tax relief and stamp duty adding greater financial pressure, difficulty in securing an attractive mortgage product can mean that for some landlords the margins just aren’t big enough to make it a viable investment any longer.
- Expensive vacant periods: One of the keys to a profitable rental property is wide appeal. If you’re finding that your property is not the right fit for rental demand in the area, you may find yourself facing expensive vacant periods.
- Increased legislation and a ban on admin fees: Increased legislation has created greater administration responsibilities, but landlords and have been banned from charging administrative fees. For many landlords, especially those who manage a buy-to-let property as an addition to their main career, this increased time demand has made the prospect of rental property significantly less attractive.
Can a landlord sell a rental property with tenants
Selling a buy-to-let property can be a bit of a ‘chicken and egg’ scenario. The property will have broader appeal and a bigger pool of potential buyers if it is sold vacant, but it’s unwise to give your tenants notice too quickly as you don’t know how long the property will take to sell.
Selling a rental property with tenants is possible, but it can be complicated. You are likely to limit the sale by only appealing to other investors. Any restriction on potential buyers is likely to have an impact on both the price you achieve and how long it takes to sell.
Although it would be more advisable to sell your property vacant, your options will largely depend on the tenancy agreement in place for the property.
Different types of tenancy:
- Assured shorthold tenancy
This is the most common type of tenancy and applies to most private rental properties. If the tenant has been in the property for at least 6 months and they have a periodic tenancy or a fixed-term tenancy and you are not asking them to leave before the end of the fixed term, you can ask them to vacate the property using Section 21. A Section 21 does not require you to give any reason for the eviction, as long as the fixed term has ended.
If you have grounds for the evicted, such as antisocial behaviour or because the tenant is in rent arrears, you can evict them using Section 8. Notice period for a Section 8 eviction will range from 2 weeks to 2 months, depending on the grounds for the eviction.
- Excluded tenancy or licence
Excluded tenancies or licences are common for lodgers who share some facilities with their landlords, e.g. kitchen and bathroom. If you have a tenant on an excluded tenancy, you are only required to give them ‘reasonable notice’. Reasonable notice for an excluded tenancy is usually considered to be one payment period, i.e. if they pay rent weekly, reasonable notice would be one week; if they pay rent monthly, reasonable notice would be one month. You do not have to give notice in writing for an excluded tenancy.
- Assured tenancy
Many tenancies that began between 1989 and 1997 are assured tenancies. It is significantly more challenging to evict a tenant from an assured tenancy as they have long-term tenant rights. You will need to check the individual terms of the tenancy agreement but, if an assured tenancy is in place, it may be that your only option is to sell the property with a sitting tenant.
- Regulated tenancy
Regulated tenancies also have very strict terms that are likely to make it more challenging to evict your tenant. You can only evict a regulated tenant if the fixed term period of their tenancy has ended. After the fixed term period has ended you will need to check their tenancy agreement to identify the individual stipulations of their agreement to assess whether an eviction would be possible.
Do you have to pay tax when you sell a buy-to-let property?
Yes, you may be required to pay some capital gains tax, but it will only be payable if you make a profit when you sell. The rate of capital gains tax you pay will depend on the level of income tax you usually pay. It will be between 18 per cent and 28 per cent. Everyone has an annual capital gains tax-free allowance of £12,000, so you will only have to pay capital gains tax on any profit make over £12,000. Selling rental property at a loss will mean you have no capital gains tax to pay.
You can use the government capital gains tax calculator to find out how much you would need to pay.
Are there any deductions you can make to your capital gains tax liability when selling a rental property?
You may be able to deduct capital expenses (the cost of carrying out significant improvements to the property) from your profit when calculating tax liability. If you sell multiple properties in a tax year you can also offset any losses you make against your capital gains liability.
Options for selling a buy-to-let property
Once you’ve made the decision to sell your rental property, it is important to consider which method of sale will best suit your circumstances.
Decide on the method of sale
Selling property at auction may offer a quicker alternative. Property auctions do tend to attract investors, so may be a better option if you choose to try to sell your property with a tenant in situ.
The biggest downside of selling at auction is that there’s no guarantee your property will sell. In fact, it’s estimated that 28% of properties that go to auction fail to sell. You’ll want to set a low guide price in order to attract interest from potential buyers, but if you fail to sell at auction that low guide price may affect your ability to sell on the open market afterwards.
An estate agent will advertise your property to the open market. This is the most common method of sale. It offers the best chance of reaching the biggest audience and therefore achieving the highest sale price.
When selling a buy-to-let property, an estate agent may not be the most convenient choice. It offers little guarantee for timescale or certainty. On average, it takes four months to sell a property on the open market. That’s a long time if you’ve made a commercial decision to sell.
Professional property buyer:
Selling to a professional property buyer will offer a great deal of speed and certainty. A genuine company should be able to buy your property with their own cash funds on a date of your choice. A sale can often be completed in as little as seven days, which means no costly vacant period while your property sits on the market.
Any genuine property cash buyer who has the funds to guarantee the sale and buy direct will buy at a discount. You can expect to receive around 80-85 per cent of market value in exchange for a quick and guaranteed sale.
Find out more about:
- Guide to buying a new build house
- The cost of moving house
- Why can’t I sell my house?
- How to find out how much a house sold for
- A guide to property indemnity insurance
- Freehold vs leasehold – what’s the difference?
- House completion – the process
- Buying a house with subsidence
- Can I sell my home and rent it back?
- Structural survey – all you need to know