Which properties should I consider selling first?

Choosing what to sell can help you create a property business that produces a better income, takes less of your time and gives your family a clearer future. The opportunity begins with deciding what you want your wealth to do next.

“Which properties should I consider selling first?” It is one of the questions landlords ask most often when they start thinking about retirement, reducing their workload or changing direction.

Two familiar plans usually emerge: “I’m selling as my properties fall vacant” and “I’ll use the proceeds to pay off some of the other mortgages.”

Both approaches can produce worthwhile results. A voluntary vacancy creates a convenient opportunity to sell, while reducing debt can improve cashflow and bring welcome peace of mind.

There is also an opportunity to make those decisions work harder for you. A sale can release capital for a better-performing property, a simpler type of investment or an ownership structure designed around your income and your family.

That makes the order of sales worth some careful thought. The property you sell first should help you move towards the life you want to lead and the business you want to own.

Decide which properties deserve to stay

A useful starting point is to look at every property as though you were choosing your portfolio afresh. Consider the money tied up in it, the income it produces and the work it creates.

A house may have been an excellent purchase twenty years ago and now contain a substantial amount of equity. Its present role in your business depends on how productively that equity is being used and what you expect from it in the years ahead.

This is where cashflow return on equity, or RoE, becomes useful. Take the annual rent, deduct realistic operating costs and mortgage interest, and compare the remaining surplus with the property’s current value less its outstanding mortgage.

For example, £150,000 of equity producing £4,500 a year gives a 3% cashflow return before income tax. Another property might produce £6,000 from £100,000 of equity, giving 6%. These illustrative figures measure cashflow; capital growth and changes in value belong in a separate assessment.

Then add the practical details. Look at repairs, service charges, tenant turnover, mortgage expiry dates and the time spent managing each property. Allow for professional management if your plan is to spend less time doing the work yourself, and compare borrowing levels so that you understand the risks supporting each return.

The properties combining substantial equity, modest income and disproportionate demands are natural candidates for closer examination. Selling one of those may achieve far more than selling a straightforward, productive property simply because its tenant happens to move first.

Give the sale proceeds a job

Work out the amount a sale would actually release. Start with the realistic selling price and deduct mortgage redemption, selling costs, any early repayment charge, necessary work and the tax due.

With that figure established, compare what the money could achieve: reducing expensive borrowing, strengthening your cash reserves, improving properties you already own or acquiring investments with better income and management characteristics.

Suppose a sale releases £150,000 after all costs and tax. Repaying £150,000 of interest-only borrowing at an assumed 6% would save £9,000 a year while that rate applies, before allowing for repayment charges and changes to tax relief. If the property sold had been producing £4,500 a year after its own operating costs and interest, the combined improvement would be £4,500 before income tax.

That is a useful starting comparison. Run the same exercise for a replacement investment, including acquisition costs, financing, management and tax, and you can see which route best supports your spending needs and preferred level of involvement.

Keep the sale-tax reserve secure while making those plans. Ordinary investment lettings have limited access to rollover relief, and taxable individual UK residential disposals normally carry a 60-day reporting and payment deadline.

Consider property that fits the next stage of your life

For some landlords, a smaller portfolio of carefully selected residential properties will be the right destination. For others, non-residential or semi-commercial property deserves serious consideration.

A shop with a flat above it, or a commercially let block of lock-up garages could offer a different balance of income, maintenance and management. Garages can be particularly interesting to landlords who understand local demand for parking and storage and appreciate relatively simple buildings.

Assess the detail that will determine the result: location, access, security, condition, permitted use, occupancy and the cost of managing the lettings.

The SDLT saving can leave more capital working for you

One attraction of qualifying non-residential and mixed-use purchases is the lower Stamp Duty Land Tax cost in England and Northern Ireland.

The non-residential purchase bands are 0% on the first £150,000, 2% on the next £100,000 and 5% on the balance above £250,000. A qualifying mixed-use purchase, such as a shop with residential accommodation above, uses those rates for the transaction as a whole.

Compare that with the higher rates for an additional dwelling:

These examples use current rates for a single freehold purchase by a UK-resident landlord, with the additional-dwelling rates applying to the residential column. They assume no VAT, linked transactions or special reliefs. Scotland and Wales operate their own property purchase taxes.

At £300,000, the difference is £15,500. That is capital which could remain available for improvements, reserves or another investment, making the acquisition more efficient from the outset.

Commercially let lock-up garages can fall within the non-residential category where they are independent of a dwelling and its garden or grounds. Their use and legal relationship with any residential property need establishing as part of the purchase. Your conveyancer can confirm the classification and any VAT or linked-transaction implications before you commit.

Use company ownership to support future income and investment

Selling selected personally owned properties can also provide the funds for future purchases through a limited company. That allows you to choose the investments, borrowing and ownership arrangements for the next stage of your business.

A family investment company, or FIC, is a company structured around family investment and succession objectives. It can hold residential or commercial property, with share rights designed to reflect how the family wants ownership and decision-making to develop.

One valuable feature is the treatment of borrowing costs. A property company, including an FIC, can generally obtain relief for allowable mortgage interest and qualifying finance costs in its Corporation Tax calculation. These are dealt with under the company loan relationship rules. The Section 24 restriction affecting individual residential landlords does not apply to companies.

For a simple illustration, take £30,000 of rent, £6,000 of allowable operating costs and £12,000 of allowable interest. Allowing for both types of cost leaves £12,000 subject to Corporation Tax, assuming no other income, adjustments or restrictions. Recognising the cost of finance in this way can support the retention and reinvestment of profits.

Non-residential property can also offer a useful finance-cost treatment in personal ownership, with allowable interest relating to the commercial letting generally deductible. For mixed-use property held personally, the borrowing costs need appropriate allocation between the residential and commercial elements.

The wider company plan can coordinate retained profits, dividends and repayment of genuine shareholder loans with your personal income requirements. Carefully designed share rights may allow parents to retain agreed control while children participate in future growth. The funding, valuations and tax consequences are then checked around those family objectives.

Ask your children what they would like to inherit

There is another conversation which deserves to happen before the sale list is finalised. Ask your children whether they would actually like to inherit a rental property business.

In my conversations with landlords, that question is often still waiting to be asked. Parents may have spent decades building the portfolio, learning the properties and developing relationships with tenants, agents, lenders and contractors. Their children may have careers, young families and homes in a completely different part of the country.

Some will welcome the opportunity to become involved. Others may prefer income from a professionally managed investment, a shareholding with clear responsibilities or capital they can use in their own lives. Knowing their preferences gives you time to prepare something that works for them.

It also helps you identify which properties will transfer well into that future. A demanding building which depends heavily on your personal knowledge may deserve a different place in the sale order from one that an agent can manage efficiently.

Picture the first twelve months after a death

Imagine that you had just lost someone close to you and were asked to take responsibility for their rental business. Alongside your own life and your grief, you would need to understand the accounts, locate the tenancy records, speak to lenders and establish how the business would keep operating.

If money were needed for mortgage repayments or Inheritance Tax, you would also have to decide which properties to sell, arrange valuations, deal with buyers and keep enough income flowing during the process.

How confidently could you organise all of that within the first twelve months? Your children may face the same practical challenge, with much less knowledge of your portfolio.

The cash requirements can begin earlier. Inheritance Tax is normally due by the end of the sixth month after death. Tax attributable to qualifying property can be paid in annual instalments over ten years, generally with interest for ordinary rental investments, and a sale normally brings forward the outstanding tax on the asset sold. These payment options should form part of the family’s cashflow planning.

You can make that first year much easier by acting while you have the time and experience to do so. A more manageable portfolio, organised records, clear responsibilities and a plan for tax and borrowing can give your family breathing space.

That preparation may involve selected sales, a cash reserve, different investments or an FIC with carefully designed ownership arrangements. It may also involve professional management and appropriate insurance or estate planning. Your family’s wishes provide the starting point.

Turn the next sale into a considered plan

A well-chosen sale can improve your income, release you from work you would rather stop doing and help your family inherit something they are equipped to enjoy. The best sequence becomes clearer when the properties, borrowing, ownership and family objectives are considered together.

This is the purpose of a £400 Property118 consultation. It gives you dedicated time to discuss what you want from your wealth, examine the choices facing your portfolio and identify the next steps worth pursuing.

We can explore which properties deserve closer review, what debt reduction could achieve, whether non-residential or semi-commercial acquisitions merit investigation, and how company ownership or an FIC might support your plans. We can also bring the practical inheritance questions into the discussion while you still have the opportunity to shape the answers.

Provide a current property schedule, your mortgage figures and an idea of the income and lifestyle you would like. If you have already asked your children what they would want, their answers will be valuable too.

You have put years into building your property wealth. A focused conversation now can help you decide how it should serve you and your family in the years ahead.

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