You can invest in property in two ways – directly or indirectly. Both ways involve some complicated financial issues, and one of those is tax. You should do your best to minimise tax to get the most out of your investment.
Property investment explained
Direct property investment means you buy all or part of the property yourself. Property tends to increase in value over time, and, in the meantime, you can rent it out or live in it.
Indirect property investment means you don’t directly own the property, but you do get a share of the profits. You buy into a property fund or company and get dividends and/or capital growth when the fund makes a profit.
If you’re buying property, you may have to pay a tax called Stamp Duty Land Tax. This tax applies if you’re buying a residential property that is more than £125,000, or a non-residential property that is more than £150,000.
There are different rates of tax depending on how much the property is worth. In other words, the more expensive the property is, the higher the rate of tax you have to pay.
From 1 April 2016, you’ll have to pay an extra 3% on top of each Stamp Duty band when you buy an additional home or a residential buy-to-let property.
Indirect property investments
Instead of buying and managing your own property investments, you can invest in property through a fund or by buying shares in property companies or schemes.
There are a few different types of property fund. Some have special tax arrangements.
Real estate investment trusts (REITs)
A REIT has two separate elements for tax purposes: a ring-fenced property letting business which is exempt from corporation tax; and non-ring-fenced activities like property management services which are not. If the REIT you invest in does well, you will receive a distribution of the profits.
Payments from the tax-exempt element are treated as UK property income for the investor and are paid net of basic rate tax - non-tax payers can re-claim this and if the REIT is held in an ISA investors receive payments gross.
Payments from the non-exempt element are treated the same as any UK dividend and paid with a tax credit.
Property Authorised Investment Funds (PAIFs)
PAIFs are a newer form of property investment fund, very similar to REITs. They also have tax breaks, which are passed on to you.
Other property investment funds
There are plenty of property funds that are neither REITs nor PAIFs and so don’t come with any special tax breaks.
Most of these are reasonably stable but some are risky.
Always check if a property fund is regulated by the Financial Conduct Authority (FCA) before you consider investing.