Why buy-to-let investors should consider using ISAs
Property has always been one of the nation’s favourite asset classes, with 48% of British people believing it’s the best way to save for retirement. However, while property has proven to be a rewarding investment over the years, many property investors aren’t taking advantage of one major investment tool that could significantly boost their returns.
Around this time every year, you’ll hear lots of people talking about ISAs. The Government’s ISA scheme allows people to save or invest up to £20,000 each year and pay no tax on gains or income. In the 2017–2018 tax year alone, British people saved over £2.9 billion in tax through ISAs.
Historically, you could only invest your ISA in cash or the stock market, but recently, a range of new opportunities have become available ― including property. We don’t think this could be coming at a better time for property investors.
Buy-to-let’s best days are behind it
One of the most popular ways to invest in property is through buy-to-let, which can’t be held in an ISA. Buy-to-let has generated impressive returns over the last decade ― if you had invested in 2009, you would today have earned a return of 92%, according to Verismart. Despite these returns, buy-to-let is tax-inefficient; landlords pay 28% tax on any gains in property values, and up to 45% on rental income.
That tax-inefficiency is only set to get worse over the next few years: The government has introduced a series of tax and regulatory changes that are making individual buy-to-let an unviable investment for many.
Before the 2017/18 tax year, if you were a buy-to-let landlord with a mortgage on your property, any interest you paid towards the mortgage payments could be deducted from your rental income before you paid tax on it. For instance, if you earned rental income of £10,000 and had mortgage payments of £5,000, you could deduct the £5,000, and only pay income tax on the remaining £5,000.
However, new rules are gradually removing that tax relief each year and by the 2020/21 tax year, you won’t be able to deduct any of your mortgage interest payment from your rental income before paying tax. That means you’ll now have to pay tax on the full £10,000, which will then qualify for a 20% tax credit on mortgage interest payments.
These changes will affect higher and additional rate taxpayers the most but many landlords could find themselves moving up into a higher tax bracket. Additionally, those on smaller profit margins could end up losing money after tax.
Of course, that doesn’t mean investing in property generally is a bad bet, and investors have already started to look for alternative, more tax-efficient options.
At Bricklane, we offer customers the opportunity to invest in the UK residential property market, earning bricks and mortar returns without the hassle of being a landlord. Investors can invest in a choice of two funds, one focusing on London properties and the other on ones in the Regional Capitals (Manchester, Birmingham and Leeds). Both funds have generated annualised returns of 6.7%*. (Past performance is not a reliable indicator of future returns.)
Two reasons buy-to-let investors should use ISAs
Investing in property through a Bricklane ISA (ISA type: Stocks and Shares), combined with Bricklane’s REIT (Real Estate Investment Trust) status, is the most tax-efficient way to invest in UK residential property. While increasing tax-penalties have eroded buy-to-let landlords’ profits, investing through a Bricklane ISA means you won’t pay any tax on property gains or income you make on your £20,000 allowance, no matter how large your investment might become.
For example, imagine you had £100,000 to invest for a five-year period and you could choose between a buy-to-let property and one of Bricklane’s funds. Assuming growth and rental income are the same for both, you would still return an extra 10.46% by investing with Bricklane, thanks to the ISA’s tax-free status. Put another way, tax erodes a third of the property market returns in the buy-to-let example below.*
Investing with Bricklane also means you can benefit from compounding returns. Compounding is the process through which you reinvest returns from your initial investments to generate further returns. Unfortunately, buy-to-let investors have a hard time accessing the benefits of compounding — it takes a long time to save enough rental income to buy another property, with which to generate more returns. However, with Bricklane, you can make your rental income work harder straight away by automatically reinvesting it in further shares.
Instead of leaving your money in a low-interest, low-risk Cash ISA, putting it to work in a Bricklane ISA allows you to continue investing in property, from your first spare £100. This means you can quickly be earning rental income and capital growth on your rental income. (Investment performance is not covered by the Financial Services Compensation Scheme)
The impact of reinvesting can add up to a lot over time. Let’s use the example of a buy-to-let landlord with £1,800 of rental income (after tax) to invest each year. They can put that in a Cash ISA which pays 1.5% interest, or invest it into a Bricklane ISA. We give an example return of 6% from a Bricklane investment below, but forecasts are not a reliable guide to future returns.
Over five years, the buy-to-let investor who puts their rental income in a Cash ISA could turn their £9,000 of rental income into £9,413 — earning them an extra £413.
The buy-to-let investor who reinvests their rental income in property with Bricklane could turn their £9,000 of rental income into £10,756 — earning them an extra £1,756. That means the return on rental income is over 4 times greater for the Bricklane investor.
Over time, this effect could be even more pronounced. (Unlike with a Cash ISA, your capital is at risk. The value of your investment can go down as well as up and investment is not covered by the Financial Services Compensation Scheme)
Both of these benefits are a large part of why buy-to-let investors like Stewart have been using Bricklane ISAs. “The tax benefits are great, the company is backed by big names, and has helpful staff,” he says. “In short, it’s a great service that my wife and I have recommended several times.”
Of course, there are pros and cons to every investment and the most appropriate choice will depend on individual circumstances, for example some will prefer the hands on approach of buy-to-let. However we expect to see more and more property investors pursuing alternative, tax-efficient ways of accessing the residential property market. By investing through a Bricklane ISA, customers can hold onto more of their gains and income by paying less tax, as well as the opportunity to benefit from compounding returns on their property investments.
If you have any questions about returns, or anything else, you can email us at support@bricklane.com, talk to us through online chat, or give us a call on 0203 1111 432. Find out more at Bricklane.com.
As with all investing, your capital is at risk.
Your investment may go down, as well as up. Although the shares are listed, if you want to sell them, there is no guarantee that you will find a buyer within a time-frame or at a price, acceptable to you. The REITs invest in residential property, which are not highly liquid assets. Rental yields and dividends may be lower than estimated.
Tax rules and allowances depend on individual circumstances and may change. The opinions contained within this blog do not constitute investment advice. Bricklane does not give advice. If you are unsure about whether investment is right for you, you should seek independent advice before investing, including tax advice.
*Fund performance is net of annual management fee and gross of investment fee (2%). Annualised performance is made up of blended performance across both funds from their launch to 01/03/19. The Regional Capitals fund returned 8.7% in Year 1 and 6.3% in Year 2. The London fund returned 9.6% in Year 1.
*In addition to rental income and Bricklane fees, total returns also include increases or decreases in property values, and transaction costs like Stamp Duty Land Tax (SDLT). This means total returns could be higher or lower than the rental income figures quoted.
This promotion is issued by Bricklane Investment Services Ltd. Trading as Bricklane.com which is an appointed representative of Gallium Fund Solutions limited (reference number: 487176), which is authorised and regulated by the financial conduct authority.
