Editor's note: This brief was summarised by The Property AI Team from a report by Property118. Read the original article for full details.
Landlord with £2.5m Equity £30k a Year Short of Living Costs
A 72-year-old landlord with approximately £2.5 million of equity in his rental portfolio is £30,000 a year short of his living costs, according to a case study published by Property118. The landlord, whose identity was kept confidential, is using his savings to cover the shortfall.
The case study, written by Mark Alexander, describes a landlord who had built substantial wealth but was using his savings to pay for everyday life and could not afford the inheritance tax planning he wanted. A conversation with his children added another reason for him to reconsider his property portfolio.
According to the report, the landlord's portfolio was producing nearly £90,000 a year before tax, but the amount he was left with after tax was only about £30,000. His living costs were £60,000 a year. The report states that Section 24 restrictions on finance cost relief were only part of his predicament, noting that mortgage interest is no longer deducted when calculating taxable residential rental profits for affected individuals, with a restricted basic-rate tax reduction taking its place.
The landlord had £300,000 in the bank, which he expected would cover the shortfall for another ten years, assuming his income and spending stayed much the same. The report notes that living longer, inflation or an unexpected expense could change that calculation.
He had considered investing the £300,000 for a 10% return, which would produce the missing £30,000, but the return would be taxable and he was worried about how much he would actually receive after tax. He also needed access to the capital, and committing money he relied upon for everyday living was a very different proposition from investing spare cash.
On inheritance tax, the landlord was concerned about an estimated £1.5 million bill. He obtained a quotation for Whole of Life insurance written into trust at approximately £3,000 a month, or £36,000 a year. The report states that this annual premium was more than the entire £30,000 he was retaining from his rental business.
The inheritance tax concern went beyond the rental portfolio, according to the report, covering a valuable main home, a holiday home and other assets, as well as a pension fund. The report notes that most unused pension funds and pension death benefits will come into the inheritance tax calculation for deaths from 6 April 2027.
The landlord was described as feeling asset-rich, cash-poor, and beginning to feel that he had somehow failed. The report adds that the Whole of Life premium was due to him being in his 70s and still in good health.
Source: Property118