"It'll never happen to me"
The second quarter of 2012 witnessed continued growth in the buy to let sector with lending increasing by a further 5% (Council of Mortgage Lenders). Compared to 2011, the buy to let market has seen growth of 14% for the quarter, a total of £3.9 billion being advanced to investors.
Paul Smee, CML director general commented "buy to let is continuing to show signs of recovery, and growing broadly in line with expectations. The rental sector has grown strongly over the last decade or so, and buy to let continues to help deliver a wider choice for tenants".
Evidently the buy to let sector is here to stay and shows strong prospects for the future. Landlords and investors who have been cautious over these turbulent times are now seeing the rewards of their decisions, and are hopefully looking forward to enjoying a bright financial future. If you asked landlords why they invest in property you'd probably find that many of them would tell you that it's their 'nest egg' or 'pension'. People's opinions about their own retirement options are broad and varied but one thing that is certain is that they would all like the comfort of a secure financial future, for themselves and their families.
The 'nothing safer than bricks and mortar' attitude has produced a wealth of investors who believe that if the worst happens their portfolio will 'look after itself' and provide financial security; but is this really the case?
In the event that a landlord dies what would happen to any equity, liabilities and rental income? It appears that the answer is by no means straight forward. Given the current economic situation regarding the availability of mortgages, its not to be automatically assumed that the beneficiaries of the deceased would just take over everything. Upon asking many mortgage lenders it appears that most of them would look for the property to be sold, the mortgage repaid and any subsequent equity to then remain in the landlord's estate. This raises concerns from a financial security point of view in the following ways;
- What if the property is in negative equity? Is there sufficient worth in the estate to cover this shortfall?
- If there is equity in the property will this be diluted through requiring a quick sale or due to agents and legal fees?
- If there is no will in place who will deal with the buy to let properties and do they have the necessary experience and understanding to do this diligently?
Another issue which is being raised more frequently is the issue of inheritance tax (IHT) and how this is dealt with in a portfolio with high levels of equity. An investor's estate can be quickly eroded by IHT thus leaving very little for the beneficiaries to the estate.
The issue of estate and inheritance tax planning should be advised by appropriately qualified individuals such as an accountant or a tax adviser. However, independent financial advisers can provide some essential financial planning tools to complement this advice and protect investors, and the beneficiary's position.
Life assurance
Life assurance can provide protection to a landlord and their beneficiaries in a range of ways. The main purpose of all the uses being to reduce the financial and emotional burden at a critical time.
In the simplest of terms a life assurance contract (life insurance policy) can provide a lump sum of cash in the event of the death of the investor which can be used across a range of areas. The level of cover chosen by the investor would be dictated by various factors at the time of application for example their liabilities, health, affordability of policy, or age. Life assurance can provide the following potential benefits to an investor/beneficiary;
- Cash lump sum to repay all outstanding buy to let mortgages and therefore leave the portfolio unencumbered. This would mean that the portfolio, and its income, would be left in the control of the beneficiaries (following the normal estate management process)
- Cash lump sum to repay a predetermined inheritance tax liability calculated against the investor's probable equity. This ideally would result in no funds having to come from the estate to pay the inheritance tax liability.
- Ensures that tenants, and therefore portfolio income, remain unaffected because if correctly managed and advised the portfolio can retain its status quo.
In addition to the above it would always be advisable to consider the benefits of writing any assets, including life policies, into trust to again manage tax liabilities and ensure estate proceeds benefit those that it should.
The management of risks such as this for an investor is as important as ensuring that a portfolio is profitable and well managed. The main reason this risk management strategy is frequently overlooked is because it is seen as overly complex, unaffordable or simply not necessary. A prudent investor would always ensure that assets whilst alive are duly protected so why not do the same to ensure that beneficiaries enjoy the same comfort?
At NE Money we provide advice every day to investors and landlords on a range of issues in relation to buy to let mortgages and estate planning. Central to our portfolio review service is the consideration of all short, medium and long term objectives of our investor clients and our on-going service ensure that clients are always a phone call away from advice and support. For more information or to talk to an adviser contact David Wilson on 0191 2361042 or email david@nemoney.co.uk quoting KIS Lettings.
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