“I can’t afford it”
Many of the clients we meet come along to our first meeting armed with the perceived notation that my services are going to cost the Earth. Cost is a huge obstacle, with many believing that what a Financial Planner will charge them outweighs any potential gain. We completely understand this standpoint; however, we believe it is wise to accurately assess a purchase on whether the resultant enjoyment or gains supersede the initial price tag, rather than simply base a decision on assumptions. A February 2018 study by the stockbroker ‘Numis’ revealed that people who seek help are more likely to increase their wealth than those who do not. Correct planning could boost your wealth in the long-term, enabling you to achieve more of your goals and achieve security in your life for generations to come.

“Financial advice is only for the very wealthy”
Many people don’t seek financial advice because they don’t believe their assets or savings warrant that kind of attention. But the reality is that good financial planning could significantly increase their finances, simply by helping them make the correct well-informed choices. Record-breaking athletes were once untrained novices; getting good advice at the start of journey will help to put you on the right track and give you the tools to become winners.

“I don’t like risk”
For anyone who has never invested, the thought of putting hard-earned money into stocks, shares or other risk-laden vehicles feels like gambling. Will they win? Are the more likely to lose? Investments go up and down- that is an irrefutable truth- and people are understandably wary of a complex world they don’t understand.

Also, let’s factor in the undeniable fact that many people simply don’t trust financial advisers. If you’ve seen or read ‘The Wolf of Wall Street’, you’ll understand why so many people hate financial types. ‘Con-men’, ‘crooks’, ‘money-grabbers’ are some of the insults banned around, and sadly, sometimes they are completely justified. The financial market has seen its fair share of scandals over the years, but it’s important to remember that there are plenty of reputable professionals out there, and there are a tremendous range of investment opportunities available, many of which would suit even the most risk-averse personality.

There are many other misconceptions we have heard in the last two decades of financial planning, but cost, feeling ‘unworthy’ and risk are the concerns I hear time and time again. However, and we’re sure our clients will agree, once you peer past those ideas, you can often see that financial planning is actually affordable, worthwhile and incredibly beneficial.
Making the right decision on your finances is hugely important and really should be done only with the help of a professional.

But these two factors alone are not why people are suddenly clambering to sell off their properties. Currently, one in five landlords and ladies are desperate to dispose of their portfolios, so why this sudden trend?

The truth is that buy-to-let investors have never had it so hard. The housing market is currently weak, and is set to further deteriorate, tough new legislation and higher taxes are making it harder to purchase a property for letting purposes, and lenders are consistently tightening their affordability checks. The main hurdle, as I will explain shortly, us the removal of Interest Rate Relief, meaning that mortgage interest will no longer be tax deductible. Retirement is also a huge factor, as many Buy-to-Let owners do not want the hassle of property investment, when they could receive the same returns from an easier to manage investment portfolio.

One of our recent clients, for the purpose of this piece is called Pete, came us to us with a real dilemma. For almost 30 years, Pete has been investing into a range of residential flats and houses, which now number nearly 40. Managing such a large portfolio of properties is Pete’s fulltime job; however, despite his rental income totalling nearly £19,500 each month, he takes a fairly modest salary of just £45,000 per year, as his outstanding mortgage debt currently stands at £1.5m.

Now that Pete is 55, he had started to consider his retirement. With all of his money tied up in illiquid property, he wanted to know how to sell his portfolio so that he could release some cash for his future. Of course, Pete had numerous obstacles to overcome to achieve his dream.

Over the coming years mortgage interest will no longer be tax-deductible, so many landlords with debt are going to have to pay more Income Tax. In retirement, increased outgoings are the last thing any of us want, so one option is to reduce the mortgage liability through the sale of property.

The general rule of thumb is that smaller properties offer a higher yield, so it is prudent for Pete to sell his most valuable, generally larger, properties first. By eradicating the outstanding debt, the rental income Pete makes could help to fund his future years and minimise the potential Income Tax he may face.

Another alternative would be for Pete to consider a company structure. By creating a company to ‘house’ the properties, Pete would incur a tax charge on the gain he has made on his properties, but he could qualify for ‘hold over relief’ if he could demonstrate that he was running his portfolio as a business; however, this is a very grey area.

Once in the company, the tax situation could slightly improve, as the net rental income and capital gains on future sales of the properties would be taxable at the lower rate of 19%. The downside is that when money is taken out of the company, Pete would be taxed as his marginal rate (currently 40%), so he would effectively be taxed twice. He would also be subject to higher rates of Stamp Duty if he transfers his properties to a company. He would also face paying Stamp Duty on his own properties, if he transferred them, meaning that placing the properties into a company could be a very unattractive option.

The second problem that Pete faces is sadly the glaringly obvious: property is illiquid. Whilst I do agree that property can form an important part of a diverse investment strategy, ‘housing’ all of your investments in property is rarely a prudent move. As I’ve already touched upon, houses cost money to maintain, but the real issue comes when you want to sell them. There are various taxes and levies to pay, which can significantly erode your wealth.

Obviously for Pete, this information comes a little too late; he has, after all, spent 40 years investing into property. However, that doesn’t mean that he can’t start to invest in other vehicles.

The strategy I suggested to Pete was that he set up some tax-efficient investments, namely an ISA and a Pension. ISAs allow you to grow your money virtually tax free and pensions allow you to defer your Income Tax to a time when you are likely to be subject to a lower rate. These wrappers often allow you to also invest in a diverse mix of funds, and elect the level of risk you want to take, so they can be tailored to your needs and goals.

By diverting some of his income into ISAs and Pensions, Pete can build up a ‘back-up’ strategy, which he can draw upon in his retirement and enable him to meet any unexpected costs or losses that his properties may cause.

If Pete fully utilised his ISA and Pension allowances, he could also look at some more sophisticated investment wrappers, namely EIS and SEIS, which could defer, and in some cases eliminate, some of the Capital Gains Tax upon sale of the properties.

The third tax hurdle that Pete may need to overcome is Inheritance Tax. For years, accountants have warned us that buy-to-let investors are amassing tax problems in the form of either Capital Gains Tax (if they sell while still alive) or Inheritance Tax (if they leave the properties in their estate).

For unmarried Pete, upon his death is estate will be taxed at 40%, as his assets far exceed the £325,00 single person threshold; if he were married, the joint allowance would currently allow for assets under the £650,00 mark to escape taxation. However, the newly introduced Residential Nil Rate Band means that further money from property could be added to this allowance, which increases each year with CPI, which may allow further IHT to be mitigated upon death.

Of course, recommending that Pete get married is not an option, so instead I recommended two strategies. The first was to make gifts during his lifetime, which would reduce his estate, ergo reduce the amount of Inheritance Tax payable upon his death. Pete can give away as much money as he chooses to, however this could have a detrimental effect on his own wealth, if he needed those funds at a later date. The monies would also end up in the estates of his beneficiaries, who in turn could lose Pete’s gift to IHT, divorce or other third parties. By simply gifting, Pete would lose control over what happens to his money if it’s gifted, and it could end up in the hands of people who he doesn’t want to receive it.

Gifting is all well and good, but for an unmarried person without children, it might not be the most suitable solution. Instead, I felt that Trusts might be a more suitable solution. When you put money or property in a Trust, provided certain conditions are satisfied, you don’t own it anymore. This means it might not count towards Pete’s Inheritance Tax bill when he dies. He would also be able to leave his assets, up to £325,000 free of Inheritance Tax, to his nominated Beneficiaries (for example nieces and nephews) to help them get onto the property ladder or realise some cash in later life when they may need it.

The fourth problem for Pete, and anyone else in a similar situation, is having to slowly sell off his portfolio. This will lessen the burden of Capital Gains Tax, but realistically this is a very slow strategy that could take him as long to accomplish as he has been accumulating his property portfolio. As Pete’s portfolio is solely comprised of residential property, he could stand to lose 28% in Capital Gains Tax per sale.

One way of navigating this problem is to make careful use of the ‘Deferral Relief’ available through a qualifying EIS Scheme. This is a very sophisticated strategy, that won’t be appropriate for everyone, but it basically means that the any gain that comes about from the sale of assets, in Pete’s case properties, can be invested into an EIS Scheme to defer Capital Gains Tax. There are strict rules and timescales in place, however, so this strategy can be highly complex and often comes with a high degree of risk.

In Pete’s case, if the total gain on a property was £100,000, he would be liable to pay £16,700 in Capital Gains Tax (28% of the gain minus his £11,300 allowance). However, if he reinvested the gain into an EIS, the Deferral Relief available would mean that he wouldn’t have to pay the £16,700 CGT to HMRC right away. Instead, he could actually claim 30% Income Tax relief on the investment, which means his tax bill will effectively be reduced to £11,690.

If Pete then went on to make a gain on the EIS investment and chose to sell it, he would be entitled to Capital Gains Relief, so no CGT will be payable at all on the gain from his EIS investment. However, the previous CGT on the property gain is once again applicable and would need to be paid to HMRC. Of course, he could choose to re-invest the gain in another EIS investment – a process that can be repeated over and over again, and he will have future years’ allowances to use.

For Pete, the growth he received on the EIS investment more than covered the CGT bill, so he effectively had some additional money to pay his tax bill and didn’t need to eat into the sum he needed to enjoy his retirement. The EIS also provides 30% Income Tax Relief, so the end sum was further increased.

Selling a property portfolio will cost you money somewhere down the line- predominantly through taxation, which is sadly inescapable for us all. If you are in Pete’s situation, we would recommend that you consult a financial expert now, to prevent you from over paying tax and potentially negatively impacting your future.

An accountant, solicitor and financial planner can work collaboratively to assess your situation, minimise your tax and look at solutions such as Trusts and property companies to help reduce the burden of selling off your assets.

At Efficient Portfolio we have a ‘Trusted Team’, which brings together all of these professional in one easy solution. If you would like to talk to us about selling your property portfolio, and gain access to our trusted professional contacts, please call 0517 898060 or email [email protected].

As you make the shift from planning your finances as a couple to going it alone, you will need to develop a resilient, flexible strategy to prevent yourself running short of funds in the future. This will also help you to cope with the unexpected. A holistic financial planning service is the way forward, whether you need to reorganise your finances now, want to establish a new financial plan for the future or make sure your plan is adaptable to any future changes. Here is how you can tackle the situation in the most effective way:

Know What You're Dealing With

If you're facing an uncontested divorce or a default divorce, the process is more straightforward than a contested divorce, which can involve considerably more expense through court cases, barrister or solicitors’ bills and costly legal fees. A different plan will be needed in each case.

Take an Inventory

If you're about to approach your spouse about a divorce or separation, make sure you have a plan about where you will live, and what your incomings and outgoings will be. Have a thorough idea of what your shared financial assets are, such as investment accounts, insurance policies and other assets (cars, houses, etc.)

Cushion Yourself

As well as money for the lawyer and other associated legal fees, you will also need a financial cushion to help you move into a new house and deal with your living expenses. If you don't, you might face the worst-case scenario of being forced to accept a divorce settlement that doesn't fully compensate you or completely support your needs. Having a financial plan in place will equip you to ascertain what is rightfully yours.

Sort Out Your Paperwork and Create a Divorce File

Getting your finances in order means first getting all your paperwork organised. Taking copies of deeds, insurance policies and other important financial documents is a good start, and you should securely store account numbers for bank accounts, credit cards and car loans, investment accounts and retirement savings accounts. Be prepared for the splitting of your financial assets by starting a divorce file so you can easily get access to all the information you need.

Seek the Help of a Financial Adviser

To ensure that if something unexpected happens in the future, and your financial plan is not derailed, you need to find a highly-qualified adviser who specialises in estate planning, taxation and investments. A professional of this type will ensure that your estate is dealt with in a tax efficient manner and is protected for your family in the future. This needs to be someone who you can trust and who understands your needs. You can read our free guide to finding an adviser here: *Finding an adviser in a post RDR world.

Undertake Lifetime Cash-Flow Planning

This process will help you to clearly see how your new future looks from a financial perspective, allowing your adviser to identify opportunities and alert you to areas that require immediate attention. Your adviser will model and calculate your future financial needs, to help you understand the implications of different divorce settlements and outcomes. Working with your adviser, you will be able to identify how to make your money work harder for you, how to improve the pensions and investments you already have in place, and you will receive recommendations on the best strategy for your new future.

Efficient Portfolio help people to clarify their situations and equip them with the tools to build a new, successful future built around their individual goals. As the founder of this company, I provide detailed and bespoke financial guidance for couples navigating divorce with a view to the future they want to create for themselves – and for their now extended family. Just because you are divorcing or your family is ‘changing form’ doesn’t mean you can’t all have a bright future ahead.

People Don’t Plan to Fail, They Fail to Plan. We Want to Ensure You Don’t.

Efficient Portfolio are holistic, truly independent, Financial Planners, which means that we look at all areas of your finances to create a complimentary strategy across the board. It is our belief that  mortgage advice, whilst being dealt with by a specialist, should closely tie in with your financial planning. This is how we differ from traditional Mortgage Brokers.

Like all aspects of financial planning, it is important to look at the bigger picture, and ensure that all of your ‘cogs’ are working together to help you achieve your goals, which is exactly what our independent experts will provide. Typically, a Mortgage Broker will just advise you about your mortgage; in contrast, our mortgage solution integrates all elements of your plan. For example, we’ve seen people come to us having arranged a 30-year mortgage to keep the costs low, but not realising that they will need to restructure their protection for longer, which significantly increases their costs. We can factor this into their planning, to ensure they are receiving the best solution for their specific needs. They will also look at any related life insurance, payment protection and even buildings and contents insurance you have to make sure that you have the most suitable protection in place. Having a safety net should be the cornerstone of your financial planning, so why risk your most valuable asset?

Over the last few years, the rules governing mortgages have also significantly tightened.  The Mortgage Market Review, in particular, has been designed to ensure that affordability is scrutinised, background checks are far more in-depth and rate increases are reviewed. Understanding these changes, and how they work in practice, means that a mortgage adviser can ensure that you are getting the best possible deal for your circumstances, in the quickest and most-cost effective way.

Very much like using us as your Financial Planner, employing the services of a registered mortgage specialist means that you will be protected, as they have a duty of care to you.  If the recommendations are not suitable for your needs, you will be covered by the FSCS, so you can complain and be compensated. By arranging the mortgage, yourself, this legal recourse is reduced.

An independent mortgage adviser will look for the best mortgage for you from the whole of the market. They aren’t on the lender’s side, they’re on yours, and are able to offer a far wider range of opportunities and choice than if you went direct. A good mortgage adviser will also review what mortgage you have in place, ensuring that your mortgage needs evolve with you over time. They will also ensure that you don’t get stung by the banks’ traditionally high fees, which are especially painful for first-time buyers.