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How higher rate taxpayers can avoid the 'George Osborne Penalty'

At the last budget the Chancellor announced that from 2017 he was phasing out higher rate tax relief on the interest payable on a buy-to-let mortgage. What this means is that whereas a 45% tax payer had a net cost of £55 per £100 of interest paid, in future this will rise to £80. 

It has been suggested that this change is aimed at creating an unequal playing field in the market, handing a considerable edge to the institutional investor. It has also been suggested that this change will result in rent rises and in some higher rate taxpayers exiting the sector to look for other more tax-effective investments.

However, for many, property will continue to be the investment of choice when it comes to providing for the future. Therefore, if you are a higher rate tax payer, it makes sense to explore the options that are open to preserve, or as we shall see, to enhance the tax relief that is available. 

One of the big attractions of property is that it is a tangible asset that an individual can own 100%. It provides a measure of control, or at least of perceived control, that you don't get with stocks and shares. Additionally, it's simple to understand, not always the case with other forms of investment.

However, as the buy-to-let market has matured and become mainstream, many investors are choosing to take a much more hands-off approach. Rather than finding and managing an individual property or portfolio, specialist property finding companies like Choices Investments  have grown up to provide investors with a range of support services from property sourcing to centralised asset management. 

Now that higher rate tax relief is being taken away, it makes sense for some people to take this hands-free approach a stage further, especially if it means avoiding an otherwise significant tax disadvantage. Irrespective of the rights or wrongs, higher rate taxpayers can continue to benefit from full relief on interest and expenses by investing in a residential property fund. 

These funds, which are only available to sophisticated investors are, collective investments. This means the money invested is pooled with other investors’ money so, in theory at least, bigger, more favourable deals can be entered into. Although funds like this have been available for years they have not enjoyed such a significant tax advantage for individuals until now. 

These structures were originally set up to incentivise individual investors to invest via their pensions in long-term assets in a hassle-free way. The investor can make the same gains as they can by investing directly but all of the work is done for them. What's more, individuals cannot invest their pension pot directly into residential property; pensions can only be invested into residential property via a fund.  The investments are often to quality proven assets, where the debt, properties and even the letting companies are already in place. As an example, Choices currently act for just such a fund - the Urban Share Residential Investment Fun - which was created in 2006. 

The Urban Share Opportunity Fund is a Limited Partnership and operated by an established London based Fund operator and asset manager, Klin Property Ltd. The day to day management is carried out by Choices on the fund’s behalf.  The Fund has around 40 investors, mostly through SIPPs or SASSs but some direct. The Fund holds 10 properties in Central London which are all let out to young professional tenants.

With these funds the investor can invest from as little as £10k. The funds typically run for 5-7 years and allow investors to benefit from capital gains and income. Whilst crowdfunding is seemingly a relatively new development, the reality in property is that a similar concept has been around for years. It has been suggested this type of tax-efficient, hassle-free investment could soon be marketed to a much wider audience than a few sophisticated investors. It may well form the model of the future of residential property investment for higher rate tax payers and those requiring a totally hands-free solution. 

For more information email Richard Klin at richard.klin@habitusgroup.com

This article was written by Richard Klin, director at Urban Share.  

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