FINANCIAL ADVICE CENTRE NEWS
Your Autumn Newsletter 2019
Your Adviser Discusses Property vs Investments
When retirement planning – which is better: Property purchase or investment portfolio?
We are often asked by our clients what constitutes the best long term planning option for their funds. There is a perception in the UK particularly that investment in ‘bricks and mortar’ is the safest long term growth option. We have broken this down into the following headings to help you consider what might be best for you.
Return on Investment
As you would expect, this overall figure varies considerably with the economic climate. Looking historically, an Investment Portfolio shows superior returns on average, over time.
• You would expect to receive a regular and increasing income from property in the form of rent. This income, is not guaranteed and potential tenancy voids should be factored into income considerations.
• Overall the yields from Property and an Investment Portfolio are the same. If you require a stable and regular income then Property probably comes out on top.
• Volatility: An Investment Portfolio can be more volatile than property – and this higher risk can mean higher returns. But not all investors will be comfortable with the perceived ‘bumpy ride’ of riskier investments.
• Borrowing (Gearing): When buying property you can increase your purchasing power using a mortgage - this cannot be done with an Investment Portfolio. This can increase the effective returns from the property but also the risk, as the borrowing is repayable even if the investment is not successful.
• Loss of tenant: This clearly only relates to Property investment. Voids in tenancy are common and even a short period of 3 months without a tenant can have a significant effect on yield.
• Interest rates: Interest rates vary over time and where a mortgage is utilised to fund a property purchase, an increase in rates reduces the income.
Property is less volatile but this will result in a lower yield. Investment in Property alone concentrates risk into one area – even when dealing with a number of properties. Whereas with investments these are diversified beyond one area.
• Costs are generally higher when purchasing property, compared to an Investment Portfolio. Research suggests that investors underestimate Property purchase and maintenance costs by around 50%.
• An Investment Portfolio has a low cost setup due to the large competitive market of funds available.
There is no contest between Investment Portfolios and Property when it comes to tax. The tax environment for Investment Property has been severely restricted over time whereas there are various routes for tax efficiency within an Investment Portfolio.
• Income Tax: Tax on dividend income, from an Investment Portfolio, is lower than that on other income. Property income is taxed at standard rates and restrictions on the deductibility of interest costs has been introduced.
• Capital Gains Tax (CGT): An Investment Portfolio is taxed at a significantly lower rate of CGT than a Residential Property. Also, with an Investment Portfolio it is possible to use your annual CGT allowance to crystallise gains and reduce your tax bill. This is not usually possible with Property as you cannot practically sell part of a property to to utilise gains annually.
• ISAs: You cannot hold a physical property in an ISA in order to take tax advantage of the tax-free status. However, this is standard practice for an Investment Portfolio.
• Stamp Duty: You will pay stamp duty on share purchases at 0.5% within an Investment Portfolio. This is generally dealt with by the fund you invest in. However, where you buy a property which is not your main residence the minimum Stamp Duty rate is 3% and increases on a sliding scale.
• Pensions: Pensions are the most tax-efficient structures for investment- but they do have some restrictive rules as they are designed to fund retirement. For instance, Pensions provide a tax free environment for your retirement savings. Although an Investment Portfolio can be held in a pension it is not possible to hold residential Property in a pension.
Flexibility, Liquidity & Access
Property Investments are generally large and inaccessible. It may not be possible to sell a Property quickly due to both market conditions and tenancy agreements. An Investment Portfolio is usually designed to be flexible and liquid- meaning funds can be accessed when needed. In addition, a small portion can be liquidated if required where a Property would normally need to be sold in full or remortgaged in order to access even a small amount of money.
Property is expensive and so a typical investor could hold one or maybe a few properties in their portfolio. These properties are often in the same geographical area. A downturn in the property market could result in a serious hit to an investors property value and income. A well-diversified Investment Portfolio would spread risk over a large number of asset types and geographical areas- which may include some property. This kind of diversification helps to insulate against downturns in particular markets or areas.
Complexity & Hassle
Most people understand Property investment but it remains that the investor has the legal responsibility of a landlord and success will also rely on good tenants. The details of an Investment Portfolio may well be less well understood but using an Independent Financial Adviser to guide an investment will avoid any pitfalls.
There is no consumer protection regarding the investment aspect of Property. Investment Portfolios are generally regulated by the Financial Conduct Authority and consumers can rely on the Financial Services Compensation Scheme and the Financial Ombudsman Service to protect them from inappropriate investment advice.
All personal circumstances are unique and we work with clients to define an investment strategy that achieves individual investment objectives. With our new mortgage and commercial lending team we are now able to give clients a full picture of the benefits of all kinds of investing.
Please get in touch if you would like to discuss any of the points raised or your investment strategy.