While property has long been regarded as a stable investment option, interest rates, increased administration and regulatory changes have introduced uncertainties and more importantly substantially lower yields.
The demand for alternative passive income sources has let to a surge in demand for Investment Bonds as a passive, tax free source of income.
Why is an Investment Bond now more being attractive than property?
Accessibility and Liquidity:
Property investment often requires substantial capital, making it less accessible to smaller investors.
While investment bonds offer lower entry barriers, enabling individuals to invest with smaller amounts and diversify across various bond options.
Moreover, investment bonds provide greater liquidity, allowing investors to access their funds more readily compared to the lengthy processes involved in property transactions.
Parts of the Investment Bond, can be easily assigned eg to children or grandchildren in a tax efficient manner which is not possible with a property investment.
Income Generation and Regular Returns
Investment bonds can provide a reliable income stream which can be deferred to suit the investors personal circumstances, for example if the investor does not require an income for say 3 years, the sum that can be withdrawn from the investment bond consolidates so that 15% of the original investment sum can be withdrawn tax free.
Property investment, while potentially lucrative, may involve periods of rental vacancies or delays in receiving rental income.
In contrast, investment bonds offer the advantage of regular payments, ensuring a steady income flow that can be reinvested or utilized for other financial commitments.
Potential for Capital Appreciation
While property investment historically offered the potential for substantial capital appreciation, the current property market landscape in the UK has experienced fluctuations and cooling measures brought about mainly by inflation hikes which has adversely impacted appreciation in real terms.
Investment bonds, however, present an opportunity for capital appreciation through the growth of the underlying assets and the potential for higher yields over time. This feature has attracted property investors who seek to preserve and enhance their wealth without the inherent risks associated with property ownership.
Property income must be declared as ‘non savings income’ as part of a tax return and taxed accordingly in line with the investors marginal rates of tax.
By withdrawing the maximum Tax free allowance each year from an Investment Bond, the investor is not required to include this in a tax return which is viewed as a major advantange for investors looking for a low administration vehicle.
Estate Planning and Inheritance Tax Mitigation
Investment Bonds can be established within a trust structure so that after 7 years, the investment will be outside of the estate for IHT purposes.
If a property investment is not made within a trust structure from the outset, it can be very expensive and complicated to transfer the property into a trust.
The Investment Bond while remaining in the trust can allow for flexible tax free lump sum distributions to be made from the trust structure while property investment distributions are much more limited and fully taxable.
Transitioning from Property to Investment Bonds
As the investment landscape continues to evolve, property investors in the UK are diversifying their portfolios by embracing investment bonds. The accessibility, liquidity, income generation, and potential for capital appreciation offered by investment bonds have emerged as compelling reasons for this transition.
By carefully navigating the shift from property to investment bonds, investors can take advantage of these benefits and build a robust and balanced investment strategy for long-term financial growth.
If you would like to discuss your options, please contact me at Calendly – Marc Burman
The value of investments may fall as well as rise and a policyholder may not get back what they put in. This information is based on my interpretation of the law and HM Revenue and Customs practice as at July 2023. I believe this interpretation is correct, but cannot guarantee it.
Tax relief and the tax treatment of investment funds may change.
The value of any tax relief will depend on the investor’s individual circumstances.
This is not personalised advice, you should seek independent advice taking into account your personal circumstances.