A retired developer based in Hertfordshire and a pharmacist from north-west London give an insight into their investment strategies, while a financial planner and a tax specialist discuss how to structure your investment and mitigate risk
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Ritesh Shah, pharmacist and owner of the One Stop Pharmacies chain in north-west London
Ritesh Shah has built up a portfolio worth around £5m. He started by steadily buying six residential properties, mostly in London, and letting them through an agent. He then turned his hand to commercial property. “The benefit is that, with five- to 10-year leases, you just have one tenant for a long time,” he says. Another plus is that, under a full repairing and insuring lease, “if anything goes wrong with the property – if it starts leaking – the tenant pays the insurance costs.”
The first commercial property Shah bought at auction was a William Hill betting shop, offering a secure income with good covenants. Shah, who is advised by consultancy The Prideview Group, says: “I’ve also looked at Barclays banks, but the lease has to be more than 10 years – at least. If the lease is too short, the bank isn’t keen to lend.”
He has now bought seven commercial properties in total, spread across London, Kent, Bradford and Peterborough, five of which were bought at auction.
Preparation for bidding starts a month before a sale and involves careful calculations based on the finance available, rental incomes and likely sale price. It is important to have a fixed price in mind before attending an auction, Shah says. He warns: “Never fall in love with a property. You’ll pay much more than it’s worth. You have to keep in mind it’s a business – it’s not your home.”
Ray Elliott, retired commercial property developer based in Hertfordshire
It was Ray Elliott’s dream property: a beautiful but run-down house, in an expensive part of town, with huge potential for profit. The one potential snag was the sitting tenant, an “old chap” who had originally owned the place but now rented it, living in squalid conditions.
Elliott bought the property at auction for “£50,000 less than it was worth” and later sold it as a vacant lot – again at auction. With the profits, he bought a modern flat in north London for the house’s former owner and is paying his rent for seven years.
Although Elliott has some more straightforward buy-to-let properties in his portfolio, he generally looks for something a bit quirky. He says: “When I buy property, I’m always looking for an angle – a way of making a real enhancement.”
With six properties – in London, Enfield and Hertfordshire – worth a combined £1.5m, he makes an 8% annual return on his total investments, which are split equally between property, cash, and stocks and shares.
Despite having worked as a commercial property developer for 25 years, Elliott admits to having a “residential bias” as a private investor. He explains: “I’m retired. Good commercial properties have to be of a magnitude to make it worthwhile: the 15-20 unit industrial estate, or a good parade of shops.
“I don’t want to employ someone, so look for things I can manage comfortably myself, perhaps with a letting agent.”
Before turning his hand to residential property, Elliott read up on the subject and regularly attended auctions – his son is in the auctions business. Although he says that a lot of property investment decisions come down to a “gut feeling”, he says that doing your homework is crucial.
Two years ago, he acted against his usual impulses and bought a parade of shops. From talking to local shop-owners and property types, he deduced that there was one buyer interested who could not organise his finances in time for the sale. Elliott bought the parade in the knowledge that it could either be sold on to the potential buyer, or broken up and sold as separate properties. “Talk to local people,” he advises. Equally, anyone buying a house should “want to know everything about the area,” he says, adding that this increasingly includes a knowledge of school areas.
Murray Smith, head of property administration at London-based financial planner Barnett Waddingham on buying property through your pension scheme
In days of reducing interest rates, property investment offers an alternative asset that helps diversify investment portfolios and also exposes investors to a market with values that tend to move independently from stock market fluctuations. Buying properties at auction offers some of the best property purchase opportunities.
However, buying property through your pension scheme can be complex enough in itself; is it even possible to buy a pension scheme property at auction? The short answer is “yes”, with some rather large caveats attached.
As you will be aware if you already hold a property in your pension scheme, the purchase process can be protracted – particularly if you appoint a solicitor who is unfamiliar with pension scheme legislation. Most providers set expectations by stating that a typical purchase takes between six and 12 weeks.
However, purchases at auction have very strict timescales – typically between 28 and 42 days from the moment the gavel strikes – and failure to complete the purchase within the stated period can result in the loss of your deposit, normally around 10% of the agreed price. So you need to do as much work as possible before the auction.
The first task is discovering whether your pension provider permits properties to be purchased at auction – not all of them do. If you need to arrange a new pension scheme, you will have the added challenge of getting this set up, with the funds in place, prior to submitting a bid.
You may have to waive your rights to any statutory cancellation periods to allow the purchase to complete in the time available. Providers that allow purchases at auction each have their own rules and requirements but, generally, they will want to approve the property before bidding commences and will normally want to set a limit on your maximum permitted bid.
The auctioneers will have prepared an auction pack, which contains everything your pension operator needs in order to approve the purchase. The approval process is designed to make sure that the property does not attract tax penalties for failing to comply with pension legislation.
The biggest risk of incurring tax penalties arises from transactions between connected parties, whether this is the vendor, tenant, purchaser or an adviser acting in connection with the purchase. To mitigate this risk, make sure that you follow the terms of any agreements precisely, and keep your pension provider informed of any change in circumstances.
Paul Dent, partner at accountancy firm Lewis Golden, on the tax implications of property
To assess a potential property transaction, a private investor needs to understand the tax consequences of their investment. The relevant factors are generally: whether the property is residential or commercial; if it is occupied; whether you plan to improve the property and sell it on or hold it as a long-term investment; and your own circumstances – in particular, your tax position and source of funds.
The options are generally to hold the property directly, through a vehicle that may additionally provide limited liability, or – if it is commercial property – to acquire it in a SIPP. It is now rarely appropriate to hold residential property in a company. Family investors could consider joint ownership with their spouse, children and other family members as an effective way to jointly invest and mitigate taxes.
Some new investors assume that a capital gain on the sale of a property held personally will be taxed at the headline rate of 20%. However, this applies only to commercial property; the capital gains tax rate for residential property investment is 28%. More importantly, if there was an intent to “trade” then the profit could be taxed at your marginal rate of income tax, which could be considerably higher. This would normally be the case when you buy and sell on quickly.
If managed correctly, VAT tends to be relatively neutral for commercial property, but it can result in irrecoverable costs, particularly at the point of acquisition.
New and long-standing property investors should regularly review their portfolio in light of tax legislation changes and their inheritance tax position.
Significant tax changes over the past two years include:
- The reform of residential and commercial stamp-duty taxes. This directly affects your cost of purchase, but can also affect your sale value.
- The announcement of a staged withdrawal of higher-rate tax relief for interest in relation to residential property held personally.
- The reduction of the threshold for the annual tax on residential property in corporate vehicles to £500,000.
- Corporation tax rates are set to reduce over the next few years, but the rate of tax on dividends has increased. So gains in a company will be taxed more lightly, alongside a potentially increased cost in extracting money from the company.
- There has been the much-publicised early pension release, but investors might like to remember that commercial property can be held within a SIPP. This may avoid the need to release pension funds (thus potentially incurring a tax charge), and the income and gain on the property within the SIPP is likely to be tax free.
