Lead Forensics
Prettys Solicitors Ipswich
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Should you invest in residential property?

December 2016

Comment from a contact

Gavin Wood FPFS, Beckett Financial Services


The issue of whether or not one should invest in residential property (other than the main residence) has been a topic which has divided opinion for many years. There are those who repeat the mantra that “houses are for nesting, not investing” while others like to have a tangible asset having become disillusioned with the volatility which can affect stock markets from time to time.

Advocates of each school of thought often expound statistics proving that their favoured investment is the best. Over the longer term equities have outperformed residential property values but there can be no disputing the fact that they are more volatile and for certain periods throughout the last 30 years, property has produced a more consistent and stable return.

Personally, I feel that residential property can have a part to play for investors as part of a diversified portfolio. The key word there is diversified. Investors who have portfolios consisting of nothing but bricks and mortar are not able to take advantage of some of the tax breaks afforded to other investments and will usually see the value of their entire portfolio move in the same direction. That is great when property values increase but not so good when property prices fall.


From a pure investment perspective, property can be a more difficult asset to manage effectively when looking to meet a client’s investment goals. For example, it is not possible to sell part of a residential property in order to utilise your annual Capital Gains Tax (CGT) allowance. Other investments, such as unit trusts, do allow you to utilise this annual allowance more effectively.

Advocates of residential property often state the merits of having a physical asset that they can see, rather than the notional value of stocks and shares noted on an annual statement. They can keep track of the capital value and also receive a regular monthly rental income stream. That is understandable. However, the physical asset can cause problems inasmuch as upkeep is required which involves outgoing costs and there is the possibility of tenants not being in the property causing rental voids.  These void periods can be particularly problematic if borrowing has been obtained in order to fund the purchase because the cost of the borrowing still has to be maintained.

There are advantages and disadvantages with all forms of investment and there is no hard and fast, right or wrong answer. The correct solution depends upon an individual's particular circumstances and goals.

Tax Changes

The Government has introduced some changes to the tax position for residential property investments which has undoubtedly decreased the attractiveness for many people considering property as an investment.

The changes began in the budget of summer 2015 when the then Chancellor, George Osborne, introduced the phased withdrawal of mortgage interest tax relief. This has effectively increased the income tax liability for those receiving rent from their properties. (This should apply to every property investor; no-one should be looking to purchase residential properties without wanting to get a regular return on their capital!)

Further changes were introduced in the autumn statement of 2015 with the changes coming into effect from 6 April 2016. The first was the introduction of a 3% surcharge in the rate of Stamp Duty Land Tax (SDLT) payable on purchase of residential investment properties. This increases the cost of acquiring the asset in the first place.

Also an 8% surcharge is levied on the rate of Capital Gains Tax (CGT) applicable on disposal of a UK residential investment property. That was interesting given that, in the same budget, the Chancellor decreased the rate of CGT for non-property assets by 8%!

For most people this will lead to a total tax liability of 28% of the profit in the property. Of course individuals can use their annual CGT allowance, which is currently £11,100, as well as deducting acquisition costs and costs of improvement when calculating the total gain.

These measures were introduced in a bid to cool rising house prices and make it easier for first-time buyers to get a foot on the housing ladder. However, the reality is that experienced property investors who do not need to undertake any form of borrowing to buy the properties have simply bought these and passed on the increased charges to tenants by way of higher rents. 

Inheritance Tax

A further tax to consider is inheritance tax (IHT). The value of any residential investment property will form part of the deceased's estate upon death and will potentially be liable to inheritance tax at 40%, depending of course upon the value of the other assets in the estate.

Contrast this to certain types of investment which attract inheritance tax exemptions such as business property relief. These assets are exempt from inheritance tax after a period of ownership of two years.  However, they can sometimes be subject to more investment risk and be more volatile in nature with liquidity often restricted.

There are ways in which residential properties can be owned within property companies and Trusts but this brings with it a whole raft of other issues to consider which is outside of the scope of this article.

In summary, it is important that anybody looking to consider residential property as part of their investment portfolio receives professional advice to fully understand the implications and costs of the new tax rules and how this will affect them before committing to any purchase.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions, views or policy of Prettys Solicitors LLP.

Gavin Wood FPFS


Beckett Financial Services

T: 01284 773776




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