Accidental Vs Professional Landlords

Jun 29, 2023 | Mortgages, Estate Planning, Investments

You can’t be serious! Accidental Vs Professional Landlords and the mine field of owning rental property

Many of us have dreamt of being a property mogul and the glamorous lifestyle we attach to multi- millionaire status but what is the reality of investing in property? Alex and Gavin discuss the considerations and the opportunities.

In the ever-evolving landscape of financial planning in the UK, it is crucial for clients to regularly reassess their investment strategies to ensure optimal they are delivering and frankly, still make any sense at all. Traditionally, building a rental property portfolio has been a popular avenue for investors. However, recent changes in taxation and mortgage interest offset rules have made this much less attractive for existing and prospective investors alike.

This article aims to shed light on the benefits of building a rental property portfolio for geared investors, while also highlighting the main alternative, the potential advantages of stocks and shares investments for a much more tax-efficient income. Additionally, we will explore how purchasing properties through a limited company can offer substantial tax advantages, despite potentially higher interest rates and levels of stamp duty.

Rental Property Portfolios: A Strategic Approach

A key driver for people to invest in property is that we all understand property. We have a home, we’ve got or have had a mortgage and we probably rented at some point. So we have a baseline understanding of the fundamentals which we don’t have with stocks and shares. It’s all ‘Wolf of Wallstreet’ or ‘The Big Short’, which are great movies but absolutely do not reflect 99% of what goes on in stocks and shares or intangible investing.

Building a rental property portfolio has long been regarded as a profitable investment strategy for individuals with a solid understanding of the property market and a long-term vision. With proper planning and meticulous management, a diversified property portfolio can generate consistent rental income, offer potential capital appreciation, and serve as a much more tangible asset than stocks and shares.

Gearing or Leveraging is a key part of doing this in a serious manner, when you get it right, it’s a ticket to a fast growing, high returning property portfolio but get it wrong and you could build a paper thin house of cards.

However, recent changes in tax regulations have made this property much less favourable for landlords…

Taxation Changes and Mortgage Interest Offset:

In recent years, the UK government has implemented significant changes in the taxation of landlords, particularly regarding mortgage interest offset. Previously, landlords were able to deduct mortgage interest expenses from their rental income before calculating their tax liability. However, since April 2017, these rules have been gradually phased out, and as of April 2020, landlords can no longer deduct mortgage interest from their rental income when calculating their tax bill.

Add to this the general increases in taxation, such as income tax allowances for modest earners hardly increasing for years, the changes to dividend taxation and increased national insurance to name just a few.
These elements have resulted in reduced profitability for many landlords, particularly those with high mortgage interest payments or operating on thin profit margins. Consequently, landlords (especially accidental landlords), who may have entered the property market without a long-term investment plan, may face increased tax burdens and reduced returns that they are simply not prepared for

Selling and Investing in Stocks and Shares: A Tax-Efficient Alternative:

Considering all the myriad challenges posed by changes in taxation and mortgage interest offset rules, landlords may find it beneficial to explore alternative investment options. One such option is selling their rental properties and investing the proceeds in stocks and shares. This approach can offer several advantages, including tax efficiency and the potential for greater capital appreciation.

Tax Efficiency: Unlike rental income, which is subject to income tax, gains from investing in stocks and shares can be subject to capital gains tax (CGT) rates, which are typically lower. This can result in a more tax-efficient income for investors, particularly when considering the benefits of utilizing tax-efficient investment vehicles such as Individual Savings Accounts (ISAs) or Self-Invested Personal Pensions (SIPPs), neither of which are taxed on gains.

But getting rid of a rental property could see you hit with a hefty CGT bill, so you have to do the calculations, weigh up the pros and the cons and make an informed decision.

Potential for Growth: While rental properties can provide a steady income stream, investing in stocks and shares offers the potential for significant capital appreciation. It’s a cold hard fact that average property price increases in the UK don’t compare well to high growth equities over the longer term. Diversifying investments across different sectors and geographical regions helps migrate risks and provides exposure to a broader range of growth opportunities.











Now, we will hold up our hands to admit, the isn’t the fairest of comparisons. It doesn’t really reflect real world experiences where you can be highly leveraged, buy a property cheap when it’s in need of renovation, rental income or the very real risks of an equity heavy investment approach but it does give you a flavour for how different it can be.

In real world comparisons Alex and the team have often seen that investing funds in stocks and shares will produce a much higher net income, with less stress and hassle than an under leveraged property. However, especially with accidental landlords (often those who inherit a parent or relatives property) the psychological connection trumps cold hard logic and they hang on to it when they should really sell.

The Tax Efficiency of Limited Companies:

It is essential to note that purchasing properties through a limited company can offer substantial tax advantages, despite higher mortgage rates. By establishing a limited company, landlords can benefit from the following:

Mortgage Interest Deductibility: Unlike individual landlords, limited companies can still deduct mortgage interest expenses from rental income when calculating their tax liability. This deductibility can help mitigate the impact of changes in mortgage interest offset rules.

Lower Tax Rates: Although limited companies may face higher tax rates compared to individual landlords, they often enjoy lower effective tax rates due to the availability of other deductions and allowances. This can result in overall tax savings and enhanced profitability.

Estate Planning Benefits: Holding properties through a limited company can provide greater flexibility in estate planning. Shares of the limited company can be transferred to beneficiaries more easily, potentially reducing an estates liability

An important consideration is that moving a property you already own into a limited company can be very expensive as legally it’s a sale and repurchase, so hefty CGT and Stamp Duty might mean this is a non starter.

Estate Planning Considerations:

Another critical aspect to consider when weighing the benefits of rental properties versus alternative  investments is inheritance tax (IHT). Properties owned in an individual’s name form part of their estate  and can be subject to IHT upon death. This can result in a significant tax burden for beneficiaries.

Often, just the family home in a nice part of Surrey, Berkshire or Hampshire can take up all of a married couples IHT allowance. Add in some rental properties and you are in expensive territory.

By contrast, investments in stocks and shares can offer greater flexibility when it comes to estate  planning. Transferring stocks and shares to beneficiaries is typically a straightforward process, often  with reduced tax implications compared to property assets.

Using Trusts you can put funds outside of estate in 7 years or less, sometimes in as little as 2 years and with every £100,000 over the allowance liable to £40,000 of tax, this is often a major consideration for wealthy families.


While building a rental property portfolio can be a very successful route for the savvy (especially for geared investors), recent tax changes have made this direct property ownership much less attractive.
For those facing increased tax burdens and reduced profitability, selling rental properties and investing in stocks and shares could offer a tax-efficient alternative. Alternatively, get serious about being a property investor, leverage the assets sensibly and keep building.

To sum up our position, get serious or get out!
Written by Alex Fry (our Managing Director) and Gavin Torpey (our Resident Mortgage Expert).