Utilising the ISA wrapper to invest into property should be a core consideration for experienced investors

By Jo Bentham8th November 2021

As many experienced investors will be aware, the benefits of investing into property in the UK can be plentiful. From consistent demand, a history of strong potential capital growth and opportunities to generate a regular income – it’s no surprise the asset continues to be a favourite of investors.

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In fact, research from Paragon Bank has revealed that property investment as a retirement plan is more popular than ever, with investment into the asset by investors aged 60–64 growing 52% between June 2020 and June 2021. 

This is further proof that, even in the midst of the Coronavirus pandemic, there remains substantial confidence in the UK housing market. 

Moreover, with multiple methods of investment into the sector including buy-to-let, property bonds and the purchase of housebuilder shares, there’s likely to be an access point suitable for most experienced investors and their wider portfolio. 

But with inflation soaring – reaching 4.2% in October, the highest rate in almost a decade – taking steps to maximise potential returns has become all the more important. 

And with research by the Royal Statistical Society commissioned by financial comparison website InvestingReviews finding that the ever-popular ISA is projected to create more annual millionaires than the lottery by 2031, it’s clear the ISA can be a powerful tool for making your capital work harder. 

Though investors were once limited to the low-yielding Cash ISA or volatile Stocks and Shares ISA, the launch of the Innovative Finance ISA (IFISA) widened the product’s scope significantly. It’s now possible to utilise a property-backed IFISA to target tax-free potential returns of up to 8% whilst supporting the provision of much-needed housing in the UK. 

 

Investing into property with a property-backed IFISA

The core benefit of investing into property using an ISA is clear: potential returns completely free from both income and capital gains tax.

And it becomes even clearer just how advantageous this is when considering that additional-rate taxpayers would need to target a rate of return over 12% outside of the IFISA wrapper to achieve equivalent to 7% within the wrapper. 

Meanwhile, the profitability of one of the most common means of property investment, buy-to-let, has diminished in recent times due to changes to tax reliefs. Since April 2020 – when the Government eliminated mortgage interest relief in its entirety – landlords have not been able to deduct buy-to-let mortgage interest payments from their rental income in order to reduce their tax bill. 

Whilst buy-to-let may still be an important aspect of many experienced investors' portfolios, it’s unsurprising given these potentially costly changes that some are looking for alternative methods of property investment. 

For said investors, utilising their annual ISA allowance as a means of maximising their potential returns is a crucial consideration. 

According to the latest Zoopla UK House Price Index, demand for housing in the UK remains strong, with buyer demand in October 19% higher than the five-year average. But supply is still not keeping pace, as the total stock of homes for sale is down more than 40% on the five-year average.

This highlights that the UK’s housing market continues to provide promising investment opportunities for investors, with the role of the property-backed IFISA  more important than ever in the provision of much-needed housing.

This, in turn, makes the property-backed IFISA an impact investment. As an increasing number of investors now look towards making a positive social, economic and environmental impact when investing – with ESG investing considered a core investment trend in 2021 – whilst property continues to be a favoured asset, the property-backed IFISA could make an important addition to an experienced investor’s portfolio. 

 

Making the most of property and the ISA wrapper 

It’s clear that property and the housing market in the UK continue to be attractive to experienced investors as a result of continuous demand – which has been exacerbated to a significant degree by the Covid-19 pandemic – and a history of strong performance. 

But with some methods of investment into the asset declining in profitability, whilst the potential of the ISA tax wrapper to maximise target returns become evermore obvious,  it could be a great time for experienced investors to consider utilising their generous ISA allowance to invest into a property-backed IFISA. This could allow said investors to get involved in property investment in a manner that is impactful as well as offering attractive, inflation-beating target returns.