Popular ways to invest in UK Property
Some buyers of UK property are not sure how to best make their investment.
There are several tried and trusted methods, with the key difference between them all being that some methods can be termed “direct investments” and some “indirect investments”.
As you might expect, there are also some differences in the way the investor is rewarded for his investment, and the way any capital profits or annual dividends are taxed.
Let’s start with direct investments.
Perhaps the common or traditional method for UK residents to acquire property is to buy in their own name with the benefit of a long-term loan from one of the major banks or building societies, aka a mortgage. This will probably be for the person’s primary residence.
There are also mortgages called buy-to-let mortgages available if the buyer wishes to acquire another property to rent out and received income from plus, hopefully, capital growth.
In either of the above cases the buyer’s name is on the title deeds and he/she has the right to determine when to sell or who to rent the property to and so on.
Rental income from any rented property will be taxable. For any private individual paying tax in the 40-45% range and renting out a property, the tax rate is up to 45% of the rental income.
Another form of direct investment is buying a UK property by setting up a UK based limited company. The number of investors buying a UK property through such a company has grown significantly over the last few years. This has been mainly to do with changes in the assessment of tax on rental income generated by the property.
If the property is owned through a limited company, corporation tax was at 19% in 2020, a significant saving compared to the 45% for ownership by private individuals.
Of course, it’s best to carefully weigh up all the pros and cons of buying through a limited company compared with operating as a private individual. It’s also prudent to take professional advice as required.
Alternatively, investors looking to acquire UK property also have the choice of making indirect investmentsinto real estate.
The ways to do this may include may be via:
Buying shares in a property investment company shares is an alternative to direct property investment. Investors can invest in immovable property through buying shares, without actually owning the house(s) or other properties themselves. This type of investment needs careful research and planning to understand the company’s investment strategy and objectives.
Yet, investing in property funds, which may or may not be listed on the stock market, is a popular route for those investors who only have a relatively small amount to invest. This is because they can still benefit from rental income or increases in capital values, albeit in proportion to the value of the shares they hold.
Obviously, there is no complete ownership of property and the decisions when to buy or sell are made by someone else. Depending on the structure of the property fund (privately held or listed), shares may be easy or difficult to sell.
A Real Estate Investment Trust (REIT) is a stock exchange listed entity which usually owns real estate across specific or multiple property sectors. Investors in a REIT have the opportunity to own or part-own prime real estate and to benefit from dividend income and returns.
By purchasing company stock or investing through a mutual fund or ETF, those involved in the REIT get a share of the income produced through the investment.
REITs are tax-efficient, long-term investment vehicles for investors that are looking for a way to invest in real estate without having to purchase outright. Shares can be sold at any time as REITS are listed vehicles.
Shared ownership platforms
Over the last 4 or 5 years, co-investment platforms have become more popular.
Investors into such platforms have absolute control and transparency over which opportunities they would like to seek exposure to. They are able to decide to invest in the specific deals offered by the platform host and which best serve their interest or investment objectives. They may select may be by geography (London or, say, the north of UK), sector (residential or student accommodation) or nature of investment.
Investors into co-investment platforms are able to utilise the power of leverage more extensively whereas REITs are bound by regulations to relatively limited leverage flexibility. Skilled and experienced project sponsors are able to responsibly employ leverage to boost returns for investors into property co-investment platforms.
Whilst investors can decide when to sell, they don’t have ownership per se or control of the assets, leaving that to the hosts.
How you choose to invest in UK property really depends on your own objectives and long-term requirements but, in any event, it’s wise to work with an advisor who best knows your personal circumstances.