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Giving a portfolio new properties

I have a significant amount of money to invest but am reluctant to put that money in shares. I already have a portfolio of shares managed by my broker and also unit and investment trusts. I am looking for capital growth in the long term and am quite interested in property investments. What might I consider? If I invest in property, what might I expect?

Property as a long-term investment has a number of attractions. Typically, it will bring capital growth and also the potential for income.

Historically, property is quite a stable investment area. Of course, there have been one or two blips but in the long term you would have to be unlucky not to see your investment grow in value. Property is also a good balancing item to a share portfolio. There tends to be a low correlation between shares and property.

You might expect to benefit from real returns by investing in bricks and mortar. By real returns, I mean growth in excess of the rate of inflation.

However, property can be considered to be fairly illiquid. Some types of specialist property might be difficult to sell at certain times. The laws of demand and supply will determine the saleability and value of property.

Purchasing property comes with costs as you will have to pay the legal, conveyancing and surveying costs, as well as stamp duty on the purchase. I assume from what you have said that you will not need to raise a mortgage to purchase property. When you eventually sell the property, you may incur a charge to capital gains tax but this could be reduced by the effect of taper relief and the use of your annual exemption. Any income generated by the rent from the property will be subject to income tax.

You may also determine that you need to appoint a manager to handle lettings of the property. But while this will be a cost to you, it may save you the problem of dealing with tenants. You can, of course, choose between residential or commercial property for investments. The residential buy-to-let market is quite popular currently.

An alternative to direct property investment might be to invest via a collective fund such as a unit trust, investment trust or insurance unit-linked fund. There is relatively little choice with the first two types and greater choice with the latter.

The tax treatment of any income or gains made will depend on the underlying type of investment chosen.

Depending on your current pension position, you might consider utilising the generous tax concessions of a pension plan and linking this to property investments. One popular way of doing this is via a self-invested personal pension. The funds inside a Sipp can come from contributions paid by you and your employer or transfers from previous pension arrangements. Only commercial property can form the asset of a Sipp as residential property is not allowed.

The future capital value of the property inside a Sipp will grow free from CGT. The downside is that the Sipp is subject to the rules of pension plans. You will not ultimately be able to benefit until you reach age 50 and only some of the benefit will be available as a lump sum. In addition, you will not be able to buy or sell property to or from connected parties, typically, yourself, relatives or business associates.

An alternative to property might be to consider a very undersold investment known as zeros because they provide zero income. Split-capital investment trusts offer two classes of share – one has a right to income in the form of dividends, the other has a right to capital of a known amount at a known future date. There is some risk but only if the underlying assets are insufficient at the known date to pay the known capital.

It is reassuring to note that, since splits were launched, none has failed to pay out in full. You can utilise your annual exemption and taper relief to reduce the effect of CGT. A collective fund of zeros will also help to reduce exposure to risk.

Finally, I am assuming your liquid capital is in an environment where it is earning the best level of interest in the most tax-efficient way possible. Interest earned on a deposit account is taxable up to 40 per cent so it makes sense to utilise the tax position of your partner if he or she is a basic-rate taxpayer. Additionally, you might consider index-linked savings certificates where the return is tax-free and guaranteed at a rate in excess of inflation.

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