As has been well reported, yesterday’s annual Budget established that all corporate investors and individual buy to let landlords will now face a 3% Stamp Duty increase on additional properties purchased from April. This is set to have particular impact on the UK’s regional investors who will see average tax payments jump up, on average, 2.5 times. However, whilst most residential investors battled large tax hikes, Property Funds received a significant and welcome boost with a substantial 8% tax cut announced.
During the Budget speech, Chancellor Osborne cut capital gains tax from 28% to 20% for higher rate tax payers and from 18% to 10% for basic rate tax payers, although gains from residential sales were notably excluded. Property Funds, however, are set to benefit from the reductions as gains arise from the sale of shares rather than the sale of property.
It appears that such funds are now set to become the investment of choice for British investors still wanting to access residential property as an asset class. Not only enjoying the reduction in CGT, these vehicles are also unaffected by the controversial changes in mortgage interest relief. Alongside this, as large investors, they can strategically capitalise from the commercial rate of Stamp Duty which applies to buildings of 6 or more properties. Whilst the Budget has seen an increase of commercial SDLT to 5%, this remains significantly lower than the new residential rates of SDLT.
“These tax exemptions and, specifically, the 8% tax cut will be a real bonus for UK investors into our latest fund, London Central Apartments III (LCA III). The Government has recognised the importance of the PRS in maintaining the UK’s position as an international business hub and a provider of domestic housing. The reduction for funds falls in line will this strategy, encouraging investment through professional vehicles and investment companies rather than through private BTL landlords. It represents a step in the right direction in terms of future regulation of the PRS sector.” comments Naomi Heaton, CEO of London Central Portfolio (LCP) whose Property Fund is currently open for subscriptions.
Another attraction for British investors, says Heaton, is the fund’s eligibility for Government approved, tax efficient savings schemes. UK investors can access LCA III through their SIPPs, SSASs and by using their new increased ISA allowance of £20,000. So far, 45% of all UK subscriptions have come through these schemes and, on the whole, UK investors currently make up 52% of the fund’s total subscriptions. Thanks to the Chancellor’s tax reductions, LCP now expect a notable uptick.
“Historically of appeal to the hands-off foreign investor, interest in LCA III from British investors was already growing. UK subscriptions into this fund presently stand 30% higher than during our first fund, launched in 2007. With the increasingly attractive tax landscape for Property Funds, we fully anticipate a further inflow of capital from UK domestic investors.”
LCA III is a listed investment company that invests exclusively in the mainstream Private Rented Sector in Prime Central London. With the flexibility of choosing your own ticket size, from £25,000, it is targeting returns in excess of 10% per annum over a five-year period.