How can I invest in property?
Investment vehicles
What is this type of investment?
Direct investment refers to buying all or part of a property. Most UK investors invest in the UK, although most countries allow overseas investors to own property in their own territories.
Features of direct investment
Direct investment offers investors control of the property, the rental income and capital gains generated.
Factors to be aware of
The high cost of property acquisition and transaction costs, such as Stamp Duty Land Tax (SDLT) of up to 4%, and responsibility for ongoing management. Direct investment also means you have the legal relationship with the tenant, which may include direct legal obligations in relation to environmental or health and safety matters.
Specific risks
The specific risks of direct investment include concentration of risk, if only one property has been purchased, as well as access to property and asset management skills.
Tax issues
The tax issues include that income tax is paid by the investor on the net rental income, and capital gains tax is paid on any gain made the property is sold.
How to invest in this product
Property can be bought through an agent or at auctions. Investors need to be aware of the risks involved and should seek financial advice where required.
The value of investments and any income from them, can go down as well as up as a result of market and exchange rate movements and you may not get back the amount you originally invested. Past performance is not necessarily a guide to future performance.
back to topWhat is this type of investment?
A Self Invested Personal Pension scheme (SIPP) or Small Self Administered Scheme (SSAS) can invest in commercial property. The property may include business premises occupied by the pension fund beneficiary. This means the rental income is paid into the pension fund. The pension schemes may often take out loans to fund the property purchase.
Features of SIPPs
Investing in SIPPs offers the ability to hold the property investment within the tax efficient pension fund vehicle (alongside the usual advantages of direct property investment).
Factors to be aware of
Property investment held in a SIPP can provide a balance to other pension fund assets. The added bonus of placing a property in a pension is tax-free capital growth and rental income. Company directors sometimes place their company's own premises in a SIPP or SSAS to benefit from the tax benefits and to become their own landlord. However, please be aware that the property becomes an asset of the pension scheme and the pension scheme must have the power to sell the property if benefits need to be paid.
Specific risks
The specific risks of investing in SIPPs include concentration of risk if the investment is in a single property, and access to property and asset management skills.
Also, property and pensions are long-term investments and there are various rules and regulations governing what is allowed, therefore the SIPP and SSAS route not suitable for everyone. Tax advisers and Independent Financial Advisers can help ascertain whether a SIPP or SSAS property investment is suitable for you.
Tax issues
The tax issues include that the pension fund is exempt from income tax and capital gains tax. However, the rules for extracting the funds held in a SIPP can be complex and involve the purchase of an annuity, which will be subject to income tax (as well as allowing the beneficiary to draw down a tax-free amount on retirement).
How can I invest in this product?
The SIPP structure can be set up by a specialist financial adviser, or you can invest directly with some brokers. Investors need to be aware of the risks involved, and should seek financial advice where required.
The value of investments and any income from them, can go down as well as up as a result of market and exchange rate movements and you may not get back the amount you originally invested. Past performance is not necessarily a guide to future performance.
What is this type of investment?
Property syndicates are a type of investment that allows investors to invest directly in property through a scheme that brings together the funds of a number of investors. Most investors restrict their investments to UK properties, although a proportion of syndicates are formed specifically to buy property in popular overseas locations.
Features of property syndicates
Property syndicates offer investors access to a larger and broader property investment opportunity than is typically available for individual investments because of the pooling of funds that they allow.
Factors to be aware of
The cost of property acquisition and transaction costs, such as SDLT of up to 4%, and on-going management, although spread is not reduced.
Specific risks
The specific risks of property syndicates include the fact that most property syndicates are not classified as Collective Investment Schemes, and, as such, are not directly regulated by the FSA. The risks associated with direct property investment also apply to property syndicates.
What are the tax issues?
Income tax is paid by the investor on the net rental income, and capital gains tax is paid on any gain made when the property is sold.
How can I invest in this product?
Investors should first check whether the property syndicate they're considering is regulated by the FSA (as most aren't), and be sure to take the appropriate financial and legal advice before considering joining a syndicate.
The value of investments and any income from them, can go down as well as up as a result of market and exchange rate movements and you may not get back the amount you originally invested. Past performance is not necessarily a guide to future performance.
What is this type of investment?
A UK authorised property unit trust is a collective investment scheme that invests in property (with up to 100% of funds invested), and in other related investments such as limited partnerships (up to 20%). Investors purchase units whose value is directly related to the value of the assets held by the trust. Unit trusts are open-ended vehicles, where the number of units increases or decreases depending on whether additional money is invested or withdrawn by other investors. Unit trusts invest in the UK and overseas.
Features of UK authorised property unit trusts
Offers a straightforward and low-cost way to invest in property, and which is managed by professional asset managers.
Factors to be aware of
The property asset managers also need to spend time managing cash to ensure that liquidity is maintained at all times.
Specific risks
The specific risks of investing through a UK authorised property unity trust include that when there are large inflows of funds, asset managers may be under pressure to acquire property quickly, regardless of market conditions. Conversely, when there are large numbers of investors wanting to take their money out by having their units redeemed, there may be pressure on asset managers to sell properties quickly, regardless of market conditions. Under these circumstances investments or redemptions may be suspended for several months.
Tax issues
The tax issues include the fact that the unit trust is exempt from capital gains tax, and pays corporation tax at a special rate of 20% on net profits. The sale of units by investors is subject to capital gains tax, and investors are taxed on the distributions from unit trusts on the same basis as dividends from UK companies.
How can I invest in this product?
Units in authorised unit trusts can be purchased through a financial adviser, or directly from the provider in some cases. However, in all cases investors should seek appropriate professional advice before investing.
The value of investments and any income from them, can go down as well as up as a result of market and exchange rate movements and you may not get back the amount you originally invested. Past performance is not necessarily a guide to future performance.
What is this type of investment?
Unauthorised property unit trusts are not allowed to be marketed to the general public, and are intended to provide the benefits of the Unit Trust structure for tax-exempt investors such as pension funds or charities. A number of unauthorised property unit trusts are domiciled offshore for tax reasons, and can be sold to certain classes of high net worth individual investors. Please consult your financial adviser for more information on these products.
What is this type of investment?
A number of life insurance and pension companies have funds that invest directly in property. These are typically one of a range of investment options available as part of an occupational or personal pension scheme. These funds primarily invest in the UK, as they are conservative in nature, but an increasing number offer overseas property investment options as well.
Features of unit linked life and pension funds
Low cost access to long-term investment in property.
Factors to be aware of
Intended only as part of a long-term pension investment strategy, with the objective of increasing the value of the pension pot at retirement, rather than to produce income. The long-term nature of the Unit linked life and pension funds means the investment has the intention of reducing risk.
Specific risks
The specific risks of unit linked life and pension funds include that - as with other asset classes - the cyclical nature of property investment means there is a risk you cash out at a bad point in the cycle. It's therefore essential you spread your pension pot assets across asset classes with weak correlation.
Tax issues
The tax issues include that investments are subject to the favourable tax treatment of pensions contributions.
How can I invest in this product?
These investments are available either as lump sum investments - typically, life bonds - or via regular contributions. Occupational pension schemes should be accessible through an employer or an adviser to the pension scheme. Personal pension schemes are available through financial advisers. Investors need to be aware of the risks involved and should seek financial advice where required.
The value of investments and any income from them, can go down as well as up as a result of market and exchange rate movements and you may not get back the amount you originally invested. Past performance is not necessarily a guide to future performance.
What is this type of investment?
Life bonds are life insurance policies usually purchased as a single premium product, and invested in a with-profits or unit-linked life fund. They can invest in both UK and overseas property.
Features of life bonds
Generally, a tax efficient way to invest in property, and which also allows the bond holder to withdraw 5% of the bond each year without an immediate tax charge.
Factors to be aware of
They require a lump sum investment, and the tax liability on withdrawals is only deferred, but not avoided.
Tax issues
The tax issues include the fact that any profit received on disposal of the bond is taxable at the investor's marginal rate of income tax. These profits will include any withdrawals made under the 5% rule during the life of the investment.
How can I invest in this product?
These bonds can be purchased through a financial adviser. Investors need to be aware of the risks involved and should seek financial advice where required.
The value of investments and any income from them, can go down as well as up as a result of market and exchange rate movements and you may not get back the amount you originally invested. Past performance is not necessarily a guide to future performance.
What is this type of investment?
This is an investment through buying shares in a listed property company that has elected for REIT status and operates in accordance with REIT regulations. The REIT regulations are intended to ensure the company is primarily engaged in property investment, rather than in development or other non-property related activities. Most UK REITs focus on the UK, though a few have European investments. This sort of specialisation is a global characteristic of REITs, and reflects the diversity of legislation in some countries.
Features of REITs
REITs can be very tax efficient, as the property company pays no corporation or capital gains on the profits made from property investment. The major UK REITs are also many times larger than most property unit trusts, and are very transparent, as they are subject to continual market scrutiny. As REITs are all listed property companies, investments in them are generally very liquid.
Factors to be aware of
Shares in listed property companies are significantly more volatile than direct property investments or unit trusts, and perform more like equities than property. However, in the long-term, their performance is more closely correlated with property than equities.
Recent performance has been much poorer than for direct property, and shares in REITs have also continued to trade at a discount to Net Asset Value, despite the removal of the tax inefficiencies that were a major explanation for the discount.
Specific risks
The specific risks include the volatility and correlation to equities over the short term. Shares in smaller REITs may also be less liquid than expected. Direct investors in REITs cannot complain to the Financial Ombudsman about the way individual REITs operate, or claim against the compensation scheme if a REIT fails. Care should also be taken to ensure that the specific activities of the property company and the associated risks are understood.
Tax issues
The tax issues include the fact that dividends from REITs are treated as income to the investor, and are taxed accordingly. Distributions are subject to a withholding tax at basic rate income tax, except for certain classes of investors who can register to receive gross rather than net payments. These include charities, UK companies, and pension funds. REITs can also be held in ISAs and Child Trust Funds (CTFs), and the managers of these can receive gross distributions, making these highly tax efficient.
How can I invest in this product?
Shares in REITs can be purchased through a stockbroker or share trading platform. Most financial advisers are able to advise on REITs, although are unable to purchase them on behalf of clients. Investors need be aware of the risks involved and should seek financial advice where required.
The value of investments and any income from them, can go down as well as up as a result of market and exchange rate movements and you may not get back the amount you originally invested. Past performance is not necessarily a guide to future performance.
What is this type of investment?
This is an investment in the purchase of shares in publicly listed property companies that have not elected to convert to REIT status. Most listed property companies stick to investing in the UK.
Features of listed property companies (non REITs)
More than 80% of the listed property companies (by value) that could convert to REIT status have done so, and the attraction of the remaining companies, despite their liquidity, may be affected by their relative tax inefficiency. However, there are a few companies that offer exposure to specialist investment sectors such as residential property, and a number of property development companies are listed.
Factors to be aware of
As with REITs, shares in property companies trade at a discount to net asset value and perform like equities in the short term. They are relatively inefficient in tax terms, as investors are effectively taxed twice on the profits of the company.
Specific risks
The specific risks of investing in UK listed property companies include volatility and correlation to equities in the short term. Shares in some smaller companies may be less liquid. Care should also be taken to ensure that the specific activities of the property company and the associated risks are understood.
Tax issues
The tax issues include the fact that the company is subject to corporation tax on income and capital gains, and investors are also subject to tax on dividends received and the proceeds of sale of shares in line with the position of other shares.
How can I invest in this product?
Shares can be purchased through a stockbroker or share trading platform. Investors need to be aware of the risks involved and should seek financial advice where required.
The value of investments and any income from them, can go down as well as up as a result of market and exchange rate movements and you may not get back the amount you originally invested. Past performance is not necessarily a guide to future performance.
What is this type of investment?
This is an investment in the shares of property companies that are listed on the London Stock Exchange, but are domiciled in the Channel Islands to overcome the tax-inefficiency issue suffered by UK property companies other than REITs. The companies tend to focus on a single country for their investments, although a number have opted for a European investment focus.
Features of UK property companies investment
These companies are tax efficient and offer liquidity in line with REITs and other listed property companies. They have also traditionally focused on maintaining consistently high levels of dividend payout (although these have reduced recently,) and on minimising development activities to reduce risk.
Factors to be aware of
The introduction of UK REITs means there is now less reason for more of these companies to be created, and there are only a relatively small number to choose from. Like REITs, they may also trade at a discount to net asset value.
Specific risks of UK property companies investment
The specific risks of investing in UK property companies include the volatility and correlation to equities in the short term. Shares in some smaller companies may be relatively less liquid.
Tax issues
As these companies are not UK resident, the tax issues include that they do not pay capital gains tax on gains arising from the sale of UK property held as an investment. Profits on UK rent are taxed at 22%, but may be mitigated, and it is often possible to achieve a true marginal rate of tax as little as 5%. Dividends are subject to 32.5% although credit may be available to offset that liability.
How can I invest in this product?
Shares can be purchased through a stockbroker or share trading platform. Most financial advisers are able to advise on these companies, but are not able to purchase them on behalf of clients. Investors need to be aware of the risks involved and should seek financial advice where required.
The value of investments and any income from them, can go down as well as up as a result of market and exchange rate movements and you may not get back the amount you originally invested. Past performance is not necessarily a guide to future performance.
What is this type of investment?
Property Authorised Investment Funds (PAIFs) are a new product announced by the Government in legislation brought in during the 2008 budget. They are a hybrid between an OEIC and a UK REIT. At present, no PAIFs have been launched, but they may become popular vehicles once the asset class regains popularity.
Features of PAIFs
They combine the tax advantages of REITs with the open-ended structures that have been popular with investors. The PAIF legislation also offers a number of technical improvements over existing REIT definitions in areas such as the range and type of property investments that can be held.
Factors to be aware of
The traditional disadvantages of unit trusts relating to cash management have been addressed in the legislation, but without any actual experience to judge them on, doubts will remain over the likely performance of these vehicles.
Specific risks
As open-ended vehicles, PAIFs are subject to the same risks that face open-ended property investments.
Tax issues
Tax issues include the fact that dividends from PAIFs are treated as property income of the investor and are taxed accordingly. Distributions are subject to a withholding tax at basic rate income tax, except for certain classes of investors who can register to receive gross rather than net payments. These include charities, UK companies, and pension funds. PAIFs can also be held in ISAs and the managers of these can receive gross distributions, making these highly tax efficient.
How can I invest in this product?
No PAIFs have been launched yet, but when they are, they will be available through financial advisers and may be available directly from the investment manager.
The value of investments and any income from them, can go down as well as up as a result of market and exchange rate movements and you may not get back the amount you originally invested. Past performance is not necessarily a guide to future performance.
What is this type of investment?
These are investment trust companies, approved by HMRC, and are listed on the London Stock Exchange, and primarily invest in UK and global property shares. Many are resident offshore for tax purposes.
Features of investment trust companies
Investment trust companies are exempt from capital gains tax, and provide a low-cost way of gaining exposure to UK or global property through shares. As a result, they do not suffer from the cash management issues and cost / time constraints that unit trusts incur through investing in property. They can, therefore, be more flexible in their investment portfolios and strategies, and may be able to enter and exit markets much more quickly than investors in direct property in unit trusts.
Factors to be aware of
As they invest primarily in property company shares, investment trust companies suffer from the volatility of the underlying shares held by the company.
Specific risks
The specific risks of investment trust companies include volatility and the correlation of returns to equities over the short-term. Care should also be taken to ensure that the specific activities of the investment trust company and the associated risks are understood. Investors should also be clear as to whether they are investing in UK or offshore companies.
Tax issues
Tax issues include the fact that gains arising from the disposal of shares in the investment trust is usually subject to capital gains tax. Dividends for higher rate taxpayers are subject to an effective tax rate of 25%, although basic rate taxpayers incur no additional tax.
How can I invest in this product?
Interests in investment trust companies can be purchased through financial advisers. Investors need to be aware of the risks involved, and should seek financial advice where required.
The value of investments and any income from them, can go down as well as up as a result of market and exchange rate movements and you may not get back the amount you originally invested. Past performance is not necessarily a guide to future performance.
What is this type of investment?
A property investment limited partnership is a partnership business that invests in and derives returns from property. Each partner subscribes capital to the partnership and receives a share of the returns. Investment levels tend to start from around £25,000 for individual investors but many partnerships will involve investments of many millions of pounds. Whilst limited partnerships can invest directly in property, the majority invest in closed-ended funds operated by professional managers.
Features of limited partnerships
Limited Partnerships have a long history as a popular UK property investment vehicle. The limited partnership structure provides a significant level of flexibility although its relative complexity means that it tends to be used for single property joint venture projects, where liquidity is not an issue and are aimed at sophisticated investors and the institutional market.
Factors to be aware of
The effectiveness of Limited Partnerships as a property investment vehicle were reduced considerably as a result of the changes to the stamp duty land tax (SDLT) rules in 2004, which introduced a SDLT charge on the sale of an interest in a property investment partnership in addition to any SDLT already paid by the partnership on the acquisition of UK property. Limited Partnerships are able to take on significant levels of borrowings increasing both potential returns and risk.
Specific risks
The specific risks of Limited partnerships include that they are generally illiquid, meaning there is no general market for shares in the partnership and in many cases they are also designed as relatively high risk and high return investments. Many Limited Partnerships invest in (unregulated) unauthorised property unit trusts and regulated as such. The managers of Limited Partnerships are normally required to be regulated by the FSA.
Tax issues
The tax issues include that partnerships are tax transparent, that is they have no tax liabilities of their own and each investor pays tax on their own share of income or gains.
How to invest in this product
Limited partnerships are available to sophisticated investors, such as high net worth individuals, and may be particularly attractive to non UK residents. However these should be confirmed as suitable for your investment needs by a regulated financial adviser. Please contact your IFA for more information
The value of investments and any income from them, can go down as well as up as a result of market and exchange rate movements and you may not get back the amount you originally invested. Past performance is not necessarily a guide to future performance.
What is this type of investment?
Property derivatives are sophisticated investment products that do not invest in property or property securities, but whose performance is based on that of the property markets, as measured by indices. They can track the performance of any established property index in any area of the globe. Derivatives can take a number of different forms including:
Spread bets, contracts for difference (CFDs) and exchange traded futures (ETFs) 'Over The Counter' (OTC) instruments such as forwards and swaps.
Most derivatives are only intended for institutional investors and investment professionals, although certain types of derviatives, such as CFDs may be available for retail investsors, particularly those based on residential property indices.
The market in property derivatives has grown rapidly over recent years, and if it follows the same path as derivatives based on other assets or commodities then the market for derivatives can be expected, in time, to be significantly larger than that for direct property or property securities.
Features of derivatives
Derivatives offer access to property investment returns without investing in property or property securities, and as a result with minimal transaction costs. For property professionals they offer opportunities to hedge or de-risk their direct property investments.
Factors to be aware of
These are complex investment instruments and require a sophisticated understanding of property markets and the instruments themselves.
Specific risks
These are high-risk investments and most are not suitable for retail investors seeking traditional property investment returns. Losses can be many times the size of the initial investment.
Tax issues
The tax position can be complex so if you are considering investing in property derivatives you should seek independent, specialist advice to ensure you fully understand the associated tax issues.
How can I invest in this product?
Those products available for retail investors can be purchased from specialist distributors. However, because of the risk involved, investors must take appropriate, specialist advice before investing.
The value of investments and any income from them, can go down as well as up as a result of market and exchange rate movements and you may not get back the amount you originally invested. Past performance is not necessarily a guide to future performance.
