How To Profit From Property Without Owning It

How To Profit From Property Without Owning It
Underwater by Julian Cohen. Why?

As the Chancellor imposes yet another tax hit on some residential property landlords in his 2018 Budget, it’s worth reviewing a variety of ways to invest in property without ever owning it.

Property Landlords Face Another Budget Tax Blow

Hot on the heels of recent tax attacks on property landlords, thousands of accidental landlords could find themselves dragged into paying Capital Gains Tax from April 2020, as valuable tax reliefs are withdrawn.  It’s expected to raise around £150 million in tax.

In his Budget statement, Philip Hammond announced major restrictions to who can claim lettings relief, meaning individuals will soon be liable to pay thousands of pounds more in tax when they sell a property.

Property Prices Are Expected To Rise

According to Savills, the average price of a house in the UK is predicted to rise by around 15 per cent over the next five years, as you can see from its forecast illustrated below.

property

Whilst owning residential property in a SIPP or SSAS will attract penal charges from HMRC, commercial property is an acceptable asset.  It’s been doing particularly well in recent times, as this property report from Money Marketing reveals.

Despite the upside, owning property isn't always plain sailing.  Fortunately, there are a number of ways you can syphon your cash and your SIPP and SSAS money into property without having to take ownership of the asset. 

Here’s a quick round up of some of the ways you could profit from property investment. 

Not all of them are SIPP and SSAS acceptable.  Sometimes it’s because they fall foul of pension legislation.  Sometimes it’s because your pension provider doesn’t allow it within its pension scheme.

As a result, if you’re considering holding property in your SIPP or SSAS, it’s important to check the position before you go too far into the process.


Property Crowdfunding

Whilst Brexit has caused uncertainty, particularly with tax rules, many investors are indirectly putting their money into co-working spaces, care homes, student housing and all manner of property development. 

These types of investment properties typically offer good yields and often bypass tax reforms.

Property crowdfunding falls into two camps. 

Debt-based crowdfunding, usually referred to as peer-to-peer lending, gives investors the opportunity to earn a pre-determined rate of interest on the money lent to the property developer.

Equity-based crowdfunding offers investors the chance to acquire an equity share in a property.  Returns could arise from rental income, or from the sale of the property.


Property Bonds

A more traditional investment route comes in the form of property bonds. 

Alternative finance providers offer investors the opportunity to support the development of residential and commercial properties.  Given the current housing deficit in the UK, this investment route enables investors to support the development of homes and receive an attractive return on their investment.

A property bond is an ideal choice for an investor seeking a fixed secured investment with regular interest payments. 

A similar investment to a property bond is a loan note.  It works in much the same way, with investors lending their money to property developers in return for fixed interest.  Security is usually offered via a charge on the property.


Property Funds

Property fund investors make lump-sum investments that are pooled together and used to purchase a range of property assets. 

Property funds tend to operate in two different ways.  Some invest directly into commercial property, physically owning the asset.  Others invest indirectly by purchasing shares in property companies or other property funds.

During the aftermath of the Brexit vote, many commercial property funds imposed withdrawal restrictions.  However, in 2017, the sector became prosperous once again, and many leading organisations have returned to their former levels without investors missing out.


Real Estate Investment Trusts

A Real Estate Investment Trust is a closed-ended, publicly traded company that provides investors with tax efficient investment exposure. 

The types of property generally purchased tend to be commercial and range from office buildings, retail spaces, flats and holiday resorts.

These trusts are considered a good investment because they're high-yielding.  They have to pay out 90 per cent of their income.  Furthermore, as the companies are required to sign long-term contracts, the income is predictable and consistent for property investors.


Exempt Property Unit Trusts

These are unregulated collective investments and typically alternative investment funds.  They aren’t authorised or otherwise approved by the Financial Conduct Authority.

Units can only be held by investors who are exempt from UK tax on capital gains otherwise than by reason of residence, such as registered UK pension schemes.  This includes SIPP and SSAS.  UK registered charities can also benefit.

Once established, an investor purchases and holds units issued by the Trust.  It uses the subscription money, together with any borrowed funds, to undertake the required transaction and pay for associated costs and fees. 

These trusts can invest in residential property, providing the relevant HMRC legislation is adhered to.


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AJ Bell Is Often The Best Value SIPP For Stockmarket Assets

That's our opinion.  Not just because AJ Bell was the first company to offer an online SIPP.  Nor that it's received many prestigious awards.  And not even because the wife of SIPPclub's Founder has an AJ Bell SIPP.  It's because it's one of the most competitive stockmarket SIPPs on the market. 

Over time, charges can wipe out a huge part of your fund.  We like AJ Bell because there are no set-up costs.  If you hold passive funds, which is our preference, or shares, investment trusts, EFTs, gilts or bonds, you pay one small fixed fee no matter how large your fund.  And when you come to draw your benefits either as occasional drawdown or UFPLS payments, there's a small charge for the whole year no matter how many times you access your money (many SIPP and SSAS providers charge more than this for each payment).  However, you should always compare charges in detail, because AJ Bell could be more expensive than other providers, depending on the type of stockmarket assets you hold.

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