In their regular monthly article for Professional Paraplanner, the Brand Financial Training team delve into some of the strategies for property investment that paraplanners can use to better serve their clients.
In today’s dynamic financial landscape, property remains a powerful investment option for many clients. However, direct investment in property, such as buy-to-let, can be costly and out of reach for many retail investors. For paraplanners assisting clients who wish to gain exposure to the property market without the high entry barriers, indirect investment methods can offer a more viable and diversified approach. Options like Real Estate Investment Trusts (REITs) enable lower contribution levels while providing potential tax efficiencies.
Direct Ownership – Residential property
Investing in residential properties for rental or resale can be a profitable venture. However, rental income is taxed at the investor’s marginal rate, while any capital gains tax on profits from the sale of the property applies at 18% for basic rate taxpayers and 24% for higher rate taxpayers. On top of this, the recent increase in the Stamp Duty Land Tax (SDLT) surcharge for additional residential properties (from 3% to 5%), coupled with the need for significant capital and the responsibilities of property management, means that many investors are increasingly seeking alternative property investment opportunities.
Direct Ownership – Commercial Property
Investing directly in commercial property i.e. office buildings, retail spaces, or warehouses can potentially offer higher returns, though they typically come with different risks and management challenges and tend not to be practical or affordable for most retail clients.
Shares in Listed Property Companies
Investors have the option to purchase shares in publicly listed property companies, which maintain diversified portfolios of properties. While these investments carry the typical risks associated with holding shares, it’s important to recognise that property companies often employ significant leverage, borrowing extensively to acquire additional properties. This can result in greater volatility in their share prices compared to the broader market.
Collectives
Vehicles such as unit trusts, open-ended investment companies (OEICs), investment trusts, and life offices provide property funds that can offer exposure to the property market. Many of these funds can be wrapped in ISAs or pensions, meaning that the income and gains generated are not subject to UK taxes, which can enhance overall performance. With ISAs, there is no capital gains tax upon withdrawal, while pensions typically allow for up to 25% of the fund to be withdrawn tax-free, with the remaining 75% taxed as earned income under PAYE. This route does present a lower-risk option for investors.
Real Estate Investment Trusts (REITs)
REITs allow investors to access property assets without direct ownership by pooling funds. They are taxed similarly to direct property investments and can include commercial and residential properties.
In the UK, companies can achieve REIT status, exempting them from corporation tax on qualifying rental profits if traded on a recognised exchange. To qualify, at least 75% of gross profits and asset value must come from exempt property letting, and rental profits must cover interest on borrowing by 125%.
REITs must distribute at least 90% of rental profits as property income dividends (PIDs) within 12 months. Properties held for investment are exempt from capital gains tax unless owned for less than three years.
Investors face capital gains tax on REITs. Payments from the exempt portion are classified as UK property income, paid net of 20% tax (reclaimable by non-taxpayers), while dividends from the non-exempt portion are taxed as UK dividends.
Property Authorised Investment Funds (PAIFs)
PAIFs are investment funds primarily focused on property that can apply for a tax treatment exempting rental profits and related income from tax within the fund, shifting taxation to the investor. Any other taxable income is subject to corporation tax.
Distributions include property income (paid net of 20% tax, reclaimable by non-taxpayers), gross interest, and dividends. To qualify for this regime, at least 60% of a PAIF’s net income and total assets must derive from exempt property activities. The fund must be structured as an open-ended investment company (OEIC), requiring unit trusts to convert to benefit.
In summary
Investing in property offers various pathways for wealth building, each with distinct risks and benefits. While direct ownership, can be financially challenging due to high costs and taxes, indirect methods like PAIFs and REITs provide accessible options with potential tax advantages.
For paraplanners, understanding these investment strategies is crucial in guiding clients who are interested in entering the property market and maximising their investment opportunities.
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