This is something that I am often asked
A lot of people that have an ISA or a
pension want to know how they can make investments in the property market for a
I will answer this in some detail in this
Before I get into the details I want to
tell you this right upfront – property prices can go up as well as down. You
need to take this into account when you are making a decision to use your ISA
or pension fund to invest in a property.
OK now we have got that out of the way
let’s have a look at what you need to do.
Investing in the Property Market using your ISA
First of all let’s look at what an ISA
actually is. In the UK there is now an Innovative Finance ISA also called the
IF ISA. This was introduced back in 2016 and it enables investors to obtain tax
free returns from asset backed securities which include property, direct
lending through specific online platforms and peer to peer loans.
Prior to the introduction of the IF ISA,
the only way that you could get your hands on tax free returns was through a
conventional “cash type” ISA or a stocks and shares type ISA. The IF ISA is not
just good news for investors; it has had a positive impact on the financing of
property development as well.
Since its introduction the IF ISA has been
very popular. HMRC records show a year on year increase of 700% in the
2017/2018 tax period. Over £290 million was invested in IF ISA accounts in that
period and it shows no signs of slowing up.
What is the reason for this popularity? It
is a simple matter of the potential returns. Most people have Cash ISA’s and
the average return on these is only about 1% to 1.5% per year. Often inflation
is above this so in theory people are actually losing money with these
An IF ISA has the potential to yield
between 3% and 12% depending on the provider. There is a downside and that is
that IF ISA’s do not have FSCS protection so there is an increased level of
How does a Property backed IF ISA work?
When you choose to invest in a property
development loan, you are banking on the property development selling at the
“loan to value” (LTV) percentage so that your capital is returned. So let’s say
that a developer borrows £5 million against a development worth £7 million.
There will be two parts to this loan –
these are known as the first charge or senior loan and the second charge or
mezzanine loan. The first charge is 50% of the LTV so in this case will be £3.5
million. The remaining £1.5 million will make the total LTV to be just over
Once the developer sells 50% of the
development the first charge loan has to be repaid in full. After selling just
over 70% of the development they must repay the second charge. This provides
you with a high yield investment opportunity.
It is all about risk and return. The higher
the risk the lender is prepared to take the higher the yield is likely to be.
With the example I gave you in mind, people that had invested in the first
charge loan would normally earn a 5% to 6% yield on their capital. If you were
part of the second charge action then you could make a return of between 8% to
One of the things that I really like about
IF ISA’s is that it is another way that you can diversify your property investments.
As a property investor you know that there are always potential risks so
diversifying always makes sense. With an IF ISA you are diversifying in new
property builds which you have probably not been involved with before.
Investing in the Property Market using your Pension
The debate about whether pensions or
property are better forms of investment has been going on for a long time. A
few years ago, a pension fund was seen as a very safe way to save for your
retirement. People have changed their views about the safety of pension funds
for a number of reasons in recent years.
Most people feel more positive about bricks
and mortar than they do a pension fund nowadays. Unfortunately there is a
distrust of the financial services industry (some of it justified), so it makes
sense that people that have pension funds want to look at investing some or all
of it into property.
Today it is possible to transfer your
pension into property but you need to be aware that there are some exceptions.
These exceptions are related to the type of property that you have would like
to invest in.
Some people have the idea that they can
take all of their money out of a pension fund and transfer it to property. This
is not necessarily the case. Others think that it is fine to transfer their
pension into a normal residential property or even a buy to let property. While
you could do this you will end up with a hefty tax bill and it would not be
Another reason why transferring your
pension into a residential or buy to let property is not a good idea is because
the property then forms part of your estate which means that it is subject to
inheritance tax. A double tax whammy!
There are Residential Property Funds that
you can transfer your pension into that does not have these hefty tax burdens.
The problem here is that you have no say in which properties that are invested
in and there are going to be fund management fees and possibly other charges to
contend with. But it is better than paying a lot of tax.
Commercial Property Investment is the way to go with
If you transfer your pension into
commercial property then you can actually gain a number of great tax benefits.
You could also find that you can benefit from rental income as well as capital
appreciation too. And if you decide to sell the commercial property you will
avoid paying Capital Gains Tax.
As long as you hold the commercial property
in your SIPP (self invested personal pension) you will not be liable for any
tax on the income that it generates. A lot of people actually purchase a
commercial property to run their business from. In this way the profits from
the business can pay off any mortgage and the pension fund receives income too.
As things currently stand these are some of
the commercial property types that you can invest in from your pension:
- Public houses
- Care homes
- Office blocks
You need to look at the potential of each
of these commercial property types before making a decision. Do you want to run
a business in the property or just rent it out? Do your homework before you
Advantages and Disadvantages of using your Pension for
As you can imagine there are advantages and
disadvantages to using your pension fund to invest in property. Here are the
- The prices of property have
been steadily increasing in most areas of the country. If this continues then
you stand to get a better return than with other forms of investment.
- It is a way to generate a
regular income from your pension investment before you reach the age of 55.
- If you need cash fast then you
can release equity.
- You will own a property asset
which will not be affected by crashes in the market.
And now the major disadvantages:
- Property prices could fall –
price rises are not guaranteed.
- If you have to acquire a
mortgage to purchase the property then you could end up in a negative equity
situation of the price falls.
- It may not suit everyone to
make a large financial outlay on a property.
- You are unlikely to sell the
property fast so it will tie up your money.
- You may require am mortgage to
buy the property.
- It is likely that there will be
costs associated with maintenance and repairs.
- If you rent out the property
then tenants represent a financial risk.
As a property investor you will be aware of
most of these disadvantages as they apply to any kind of property investment.
What I have provide you with in this post
is the facts as I see them concerning ISA and pension property investment. You
should not consider me to be an expert in this and I strongly recommend that
you seek professional advice if this kind of property investment is of interest