Buy-to-let Property vs Pensions

Building Modern 1155942172
Published: 03 Dec 2015 Updated: 03 May 2016

Buy-to-let Property vs Pensions

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% Stamp Duty levy on buy-to-let investments. These measures together reduce the attractions of buy-to-let investing. David Smith, Director of Financial Planning at Tilney Bestinvest examines how buy-to-let property investing stacks up against pensions.

“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% to buy their ‘perceived’ preferred retirement vehicle. Similarly, those approaching retirement would often consider using accumulated savings to buy a buy-to-let 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% of all respondents considered buy-to-let as an attractive long term investment, whilst only 34% 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% 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% 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 consider retaining 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 get a further £20 put in by the Government – a 25% 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% 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; consider contributing before the budget next year, to ensure you get maximum relief."

To discuss this issue or any other financial planning topic please contact David Smith on 0191 269 9970 /

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*YouGov survey of 2,311 GB adults aged 50+. Research carried out 25th – 27th March 2015

Press contacts:

Jason Hollands
0207 189 9919 / 07768 661382

Gillian Kyle
0203 818 6846 / 07989 650 604

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About Tilney Bestinvest

Tilney Bestinvest is a leading investment and financial planning firm that builds on a heritage of more than 150 years. We look after more than £9 billion of assets on our clients’ behalf and pride ourselves on offering the very highest levels of professional client service with transparent, competitive pricing across our entire range of solutions.

We offer a range of services for clients whether they would like to have their investments managed by us, require the support of a highly qualified adviser, prefer to make their own investment decisions or want to take more than one approach. We also have a nationwide team of expert financial planners to help clients with all aspects of financial planning, including retirement planning.

We have won numerous awards including UK Wealth Manager of the Year, Low-cost SIPP Provider of the Year and Self-select ISA Provider of the Year 2013, as voted by readers of the Financial Times and Investors Chronicle. We are pleased that our greatest source of new business is personal referrals from existing clients.

Headquartered in Mayfair, London, Tilney Bestinvest employs almost 400 staff across our network of offices, giving us full UK coverage, and we combine our award-winning research and expertise to provide a personalised service to clients whatever their investment needs.

The Tilney Bestinvest Group of Companies comprises the firms Bestinvest (Brokers) Ltd (Reg. No. 2830297), Tilney Investment Management (Reg. No. 02010520), Bestinvest (Consultants) Ltd (Reg. No. 1550116) and HW Financial Services Ltd (Reg. No. 02030706) all of which are authorised and regulated by the Financial Conduct Authority. Registered office: 6 Chesterfield Gardens, Mayfair, W1J 5BQ.

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This release was previously published on Tilney Smith & Williamson prior to the launch of Evelyn Partners.