Offering hands-off exposure to the ever-popular property market whilst targeting often inflation-beating, tax-free target returns, it’s clear that property bonds and the Innovative Finance ISA (IFISA) could together be an important consideration for experienced investors.
The ISA tax wrapper has long been a staple in investors’ portfolios due to its unrivalled tax reliefs. But with Cash ISA interest rates hovering around historical lows and the Stocks and Shares ISA enduring intense fluctuations as of late, it’s unsurprising that experienced investors are searching for an ISA product uncorrelated with both.
This is where the IFISA becomes key, as it opens the ISA market up to alternative investments and the investor-favoured asset of property.
To understand just how powerful the IFISA and property bonds can be both on their own and when used in conjunction with one another, there are four core things you need to know.
1. Property bonds are often IFISA-eligible, meaning all returns are completely tax-free
Since the IFISA was introduced by the Government in April 2016, experienced investors have had the ability to hold alternative assets including property bonds under the popular ISA tax wrapper.
Before this, the generous ISA allowance – which is £20,000 in 2021/22, and will remain at this figure for 2022/23 – could only be subscribed to cash, stock and shares.
With property bonds often IFISA-eligible, experienced investors are now able to further diversify their ISA portfolio. But the core advantage is that, when held in an IFISA, all returns generated by the property bonds – which are often in excess of an inflation-beating 7% – are free from both income and capital gains tax, helping to maximise potential returns at a time when doing so is more important than ever.
And the power of the tax-free status becomes all the more apparent when considering that to target 7% outside of the ISA wrapper, this equates to a Gross Equivalent Return of over 12% for additional-rate taxpayers.
2. You can benefit from features such as ISA transfers when investing into property bonds with an IFISA
In addition to the annual, tax-free ISA allowance, experienced investors can also make use of often under-utilised but incredibly beneficial ISA transfers when investing into property bonds via an IFISA.
When transferring an ISA – provided the correct ISA transfer process has been followed – transferred funds are not deducted from your current ISA allowance. This can allow you to save or invest what could be considerably more than the £20,000 ISA allowance each tax year, as well as ensuring your past allowances continue to work hard to meet your investment goals.
And ISA transfers could, at present, be more advantageous than ever for experienced investors.
Those looking to rebalance their ISA portfolio – for example, because you are disillusioned with the volatility of the equities market or concerned that rock-bottom Cash ISA rates are eroding the real value of your capital – could choose to transfer a portion of their funds to a property-backed IFISA, as the IFISA and the UK property market have both proven exceptionally resilient throughout a period of unprecedented economic instability.
Research from Peer2Peer Finance News has also revealed that in the four years from 2018 to 2021, the IFISA even outperformed the stock market in the UK, namely the FTSE All Share Index, whilst demonstrating more stable returns.
3. Investing into property bonds is an example of an impact-driven investment
ESG (Environmental, Social and Governance) and impact-driven investments have grown exponentially in recent years, with Big Society Capital’s annual Market Sizing Report finding that social impact investing reached a value of £6.4 billion in 2020.
It’s clear that an increasing number of investors want to add impact-driven investments to their portfolio. And this is possible when investing into property bonds, whilst also targeting attractive (tax-free, when held in an IFISA) returns and gaining exposure to a popular, resilient asset.
The alternative finance provided by property bonds supports small and medium-sized housebuilders in the delivery of much-needed housing amidst a growing gap between supply and demand.
With the Government’s housebuilding target of 300,000 new homes per year by the mid-2020s on course to be missed by close to a decade, SME housebuilders are imperative in helping to pick-up the pace of delivery.
But that’s not all. Supporting regional builders through property bonds has a substantial economic impact, creating local jobs both within the construction sector and the wider supply chain, from architects through to interior designers.
SME builders can also be instrumental in regenerating local communities. As they’re developments are typically smaller and more bespoke than those delivered by their national counterparts, they’re often able to make use of brownfield land, revitalising unused – sometimes run-down – areas, all while preserving the UK’s beautiful countryside.
In addition, many SME housebuilders offer mixed-tenure developments with houses for sale, to rent and boasting schemes such as rent-to-buy and shared ownership, potentially aiding in making housing more affordable for a wider range of people.
4. Property bonds are an important consideration for experienced investors wanting more hands-off exposure to the property market
Property has been a favourite asset of many investor’s for some time. And whilst buy-to-let is often the most common method of property investment that comes to mind, for experienced investors looking for more hands-off exposure to the market – or those disillusioned with the decreasing profitability of buy-to-let due to changes to tax reliefs – property bonds could be a more appropriate option.
When adding property to your portfolio via property bonds, you’re still able to benefit from the UK property market’s reputation for consistent demand and history of strong potential capital growth, but without the time-consuming nature of the likes of buy-to-let.
Your investment is typically supporting entire developments, but you have – for example – no maintenance responsibilities for the properties, or financial responsibilities. In addition, many property bonds providers charge no fees whatsoever to investors, and paired with tax-free target returns when held in an IFISA, this can go a long way in maximising potential returns.
Though some investors are particularly attracted to buy-to-let due to its ability to provide a regular income, some property bonds offer the provision of quarterly interest payments for experienced investors wanting the opportunity to supplement their income on a more regular basis.
Investing into property bonds with an IFISA
For experienced investors wanting to diversify their portfolio with an alternative means of property investment, the benefits of property bonds are clear.
And whilst there are several methods of investing into property bonds – such as directly, or via your Self-Invested Personal Pension (SIPP) or Small Self Administered Scheme (SSAS) in some instances – doing so via the tax-free IFISA is a crucial consideration for those looking to maximise their investment.