LONDON: The change in tax laws, which makes commercial property funds eligible for tax-efficient savings schemes, will provide an 8-billion-pound boost for the funds this year, according to taxation experts.
The change, mooted by chancellor Gordon Brown in the pre-budget report, and which has come into effect last week, allows property funds to be included in Individual Savings Accounts (ISAs), Personal Equity Plans (PEPs) and Child Trust Funds (CTFs) for the first time. Previously investors could gain property exposure in ISAs through shares of property companies.
The change is a direct result of last month’s decision to allow real estate investment trusts to be included in ISAs and PEPs from January 2007.
Fund managers estimate that nearly 82 billion pounds are now invested in ISAs and PEPs.
Investment advisers recommend 5 per cent to 15 per cent of a person's investment target to be invested in property (excluding the value of the existing owned property). This calculation will give the sector an 8-billion-pound boost, the fund managers estimate.
Some financial advisers are skeptical as they feel the best returns from such investments are now passe. But, the strong performance of the commercial property sector in the past few years may still attract investors into this field, and there could be disappointment.
The commercial property market has had a strong performance that it has to pause for breath at some point, they say. The sector generated total returns of 18 and 15 per cent respectively in 2004 and 2005.
However, the general opinion is that commercial property can be an attractive diversification tool as it has little correlation with the stock market.
It is also pointed out that tax breaks from commercial property investments are not advantageous for basic rate taxpayers. The commercial property funds are required to pay 20 per cent tax on income received from rentals, which cannot be reclaimed by ISA managers. Basic rate payers will not, therefore, make any income tax savings by holding these funds, though they can avoid capital gains tax.
However, there is benefit for higher rate taxpayers as they are required to pay an additional 22.5 per cent income tax on the gross income. So, when they hold commercial property funds in an ISA or PEP, they can avoid the additional liability.
M&G Securities, New Star Property Unit Trust, Norwich Property Trust and SWIP Property Trust are the major players in this segment.
Posted
on : Sat, 07 Jan 2006 14:05 GMT | Investments News
By : Rob Davis
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