Punitive tax changes to buy-to-let mean up to £1.4bn of assets could be 'on the move', writes Simon Heawood, but advisers looking to capture some of that market need to consider alternatives that resonate in a similar way
Giving advice on residential property investments is a tricky business for financial advisers and wealth managers of all stripes. Most will have first-hand experience of the client whose unshakeable attachment to bricks and mortar has thrown an otherwise carefully planned and risk-managed portfolio into disarray.
Few investments have outperformed UK residential property on a risk-adjusted basis in recent decades - and none has attracted as much capital. It is little wonder then that almost 50% of people consider property to be the best way to save for retirement, according to recent data from the Office for National Statistics.
Buy-to-let is now a £1.4 trillion asset class owned by 2.5 million investors, dwarfing the size of assets under advice. The result is that financial lives are split down the middle - standard investments, managed by expert advisers, versus property, as managed by the individual. The balance of the market is such that many clients will own at least as much in buy-to-let as they have under advice.
All this risks making the judicious adviser look self-serving if they suggest that tax-efficient pensions and ISAs, appropriately diversified and managed under their fee purview, would be the wiser investment approach. And yet, with recent punitive tax changes adding to the traditional drawbacks of buy-to-let - concentration risk, hassle, inflexibility and so forth - there has never been a more important time for advisers to be discussing property investments candidly with their clients.
At the same time, there has never been a better moment for the entrepreneurial adviser to suggest innovative solutions and win assets from existing and new clients alike. What sort of conversations, then, should advisers be having with their clients?
The first imperative is to establish the real ‘bottomed out' economics of their existing buy-to-let investments.
A significant 'advice gap' has opened up as a result of the rapid succession of tax and legislative changes to the buy-to-let regime. Research from mortgage lenders repeatedly shows the majority of buy-to-let investors do not understand the scope of recent punitive tax changes - nor have they run the numbers on their own properties.
As borrowers remortgage and tax returns are filled in, it should become clearer to amateur investors that their returns are deteriorating, their obligations to tenants are growing and the time they need to spend managing their buy-to-lets themselves is less and less justified. Against this backdrop, even minimal tax guidance from an adviser can be of significant value.
Real-asset investments are emotional - force your clients to take a fresh look at the true financial returns of their properties, the opportunity cost of that capital tied-up (both financial and personal) and roleplay the end game for that investment. How does this asset get passed on without punitive inheritance taxes? How can exposure be gradually sold down? What expertise does your client have in timing this market?
The recent moves against buy-to-let will not dampen enthusiasm for the property market, we believe - rather only for direct ownership as the default mode of investment. This opens up a set of more sophisticated options for the adviser to incorporate existing holdings into professionally managed portfolios, and to take a total view of clients' financial lives. When tailored to specific circumstances, indirect investments can provide property exposure tax-efficiently, and with all the risk-management benefits of unitisation.
Most simply, directly-held properties can be sold with some of the proceeds put into ISA and SIPP eligible residential property funds. These typically offer a hassle-free combination of income and capital growth from diversified portfolios.
Location, location ...
Bear in mind that location is key in the residential market, so do take care over where funds invest, the exact nature of the assets, and whether price performance is passed on directly or distorted by equity markets. As always, attention should be paid to the wide variance in fund charges.
Some residential funds will even allow properties to be rolled-in in exchange for shares, giving investors the prospect of a quicker sale and subsequent asset diversification. And remember REITs might be the ideal acquiror for clients with SPV wrapped properties, because they have the ability to extinguish latent corporation tax liabilities on chargeable gains - in other words they may be able to make your client a better offer than would be achievable on the open market.
In short, advisers can make themselves indispensable by planning around existing property investments, and providing realistic investment alternatives. As the advisory market evolves, we believe the winners will be those that embrace clients' whole financial lives, and solve the complex problems that clients struggle to articulate to themselves - robo-advisers will obviously never fulfil this function.
Property has been a popular investment decision precisely because it is seen by some to occupy a fabled position between cash and stocks - capital is at risk, but it is an investment savers can see and touch, and that they feel they understand. Advisers looking to capture £1.4 trillion of buy-to-let assets ‘on the move' should find alternatives to direct buy-to-let property investment that resonate in a similar way.
Simon Heawood is CEO of Bricklane
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