How to Beat Buy-to-Let Taxes

The property market has traditionally provided very healthy long-term returns to investors. Buy-to-let has been the weapon of choice for many. However, the increasing tax burden of buy-to-let is driving investors to look for other, more tax efficient ways to get these returns.

Holding buy-to-let property in a SIPP isn’t a viable option because of the punitive tax charges that are incurred. And holding property directly in a personal pension isn’t allowed.

So how can you use your pension to invest in property?


UK Property Funds are Problematic

Traditionally Unit Trusts and Open Ended Investment Companies (OEICs) have provided a convenient investment vehicle for anyone wanting to invest their pension in UK property.

But the move by a number of UK property fund managers to change the charging structure, impose ‘Fair Value Adjustments’ or even suspend trading of their unit trust/OEIC funds have effectively closed down many of these investment opportunities.

The moves have been made in response to net outflows due to a surge in redemption requests caused by worries about the fate of their property funds and the tumbling price of the pound.

The best performing property investments recently have been global funds with a focus on commercial property

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Large-scale outflows cause problems for commercial property funds because they are based on assets that are difficult to sell quickly when investors want their money back. Restrictions on withdrawals are then put in place to give fund managers time to sell their properties. Otherwise, they would be forced to sell assets at fire-sale prices to fund the redemption requests. This drives down the fund’s value, encouraging more investors to cash out, creating a vicious circle.

We have therefore been taking a fresh look at property fund opportunities, focusing on investment trusts which offer solid performance and avoid the liquidity risk issue inherent in unit trusts/OEICS. The best performing property funds recently have been global funds, as opposed to UK-specific funds, and focused on commercial property, as opposed to residential property. However, future recovery prospects for the much-maligned UK commercial property sector should not be ignored.

Global Property Funds That We Like

Notable strong contenders whilst writing include TR Property Investment Trust, which is a UK-based investment company, listed on the FTSE 250 index. It aims to maximise total returns for investors by investing in international property and property shares. It provides diversified exposure to a large range of commercial property interests and shares. Over the long term the trust has a good record of delivering growth in both capital and income. With very low ongoing charges of just 0.69%, it is led by Marcus Phayre-Mudge, who has extensive property investment knowledge going back to the 1990’s. Since taking over full responsibility for this trust in March 2011, it has performed well, with the share price rising 83.3%.

tr property investment trust fund performance

TR Property Investment Trust has shown consistent capital and income growth

Another contender offering good performance records and future prospects include Schroder Real Estate Investment Trust. This is a UK-based real estate investment trust (REIT). The investment objective of the Trust is to provide shareholders with an attractive level of income together with the potential for income and capital growth through investing in the United Kingdom commercial real estate. It is recovering from the recent over-egged collapse of the UK property market and over the past three years, it has produced a return in excess of 28%.

A final suggestion is the F&C UK Real Estate Investments Limited, which offers an attractive level of income together with the potential for income (currently yielding around 5.17%) and capital growth from investing in a diversified UK commercial property portfolio. This investment trust is also recovering from the recent post-Brexit result collapse of the UK property market and over the past three years, it has produced a return in excess of 47% (68.6% over 5 years).​

If you would like to chat about your portfolio please contact us on 0800 989 0029 or contact us to arrange an appointment.

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About the Author

By Nigel Reeves: My mission is to provide the quality, honest & jargon-free pension advice that people need to secure the retirement they deserve. At home, I'm a family man and an active supporter of grassroots sports!

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