Mill Residential REIT offers way to put buy-to-let property in your pension
Thanks to a new investment trust that invests in rented property, landlords can transfer properties into their pensions and grab big tax breaks.
A new investment trust is set to launch, which allows you to place buy-to-let property investments directly into your pension.
The Mill Residential REIT, launched by the Mill Group, is the first to invest solely in UK buy-to-let residential property. Mill Group claims that this trust has been designed for investors keen to gain exposure to buy-to-let property, without taking on the risks and hassles of becoming amateur landlords.
So what is a REIT? And is this a smart way to get some property in your pension?
What is a REIT?
Since 2007, UK investors have been able to invest in commercial property via specialist trusts known as real estate investment trusts (REITs). These close-ended trusts have shares that are publicly listed on the London Stock Exchange and trade during market hours, just as other equities do.
REITs allow investors to assume the risks and rewards of holding UK property, without having to buy buildings directly. Until now, REITs could own commercial and residential property, but did not venture into the letting of owner-occupied buildings.
A new class of property investment
Mill Group expects to float this REIT in London next month and, to get started, it has raised seed capital of over £2 million from its managers. In addition, it is offering £300,000 of shares directly to the public via crowd-funding site SyndicateRoom. The minimum investment via SyndicateRoom is £1,000 and shares in the initial public offering (IPO) are being offered to both institutional and crowd-funding investors.
Mill Residential owns a portfolio of buy-to-let residential properties and, as a REIT, will pay no tax on its main rental income and profits from sales (its capital gains). In addition, investors owning shares in the trust inside ISAs or self-invested personal pensions (SIPPs) will enjoy tax-free dividends and capital gains, delivering huge tax advantages to these shareholders.
Tax-efficient, hassle-free buy-to-let
The trust's initial portfolio consists of properties located in London, the south of England and the Midlands, with values ranging from £180,000 to £430,000. This portfolio is almost fully let and already generating substantial rental income, according to Mill Residential's managers.
David Toplas, chief executive of Mill Group Residential, said, "Mill Residential REIT will add further value to its portfolio through development and refurbishment, and offer its shareholders a tax-efficient, affordable and, when listed, more liquid alternative to owning a self-managed, buy-to-let property."
Landlords: swap property for shares
As well as arranging an IPO, Mill Residential aims to expand rapidly by buying portfolios of buy-to-let residential properties directly from established landlords, whether individuals or limited companies.
By selling to Mill Residential, British landlords can swap their directly owned bricks and mortar to Mill Residential for shares in the trust. Alternatively, investors can sell their existing properties and invest the proceeds into the trust's shares.
Of course, selling properties other than your main residence often produces sizeable capital gains, on which Capital Gains Tax (CGT) may be payable. CGT rates are 18% for basic-rate taxpayers and 28% for higher-rate and additional-rate taxpayers. However, each person has a nil-rate band for CGT of £11,000 this tax year, which lessens this tax bill.
What's more, a big CGT bill could be offset by transferring the REIT shares into a SIPP as contributions to pensions, including SIPPs, attract tax relief at your highest rate.
For basic-rate taxpayers, your SIPP manager will automatically claim 20% tax relief on your contributions. This boosts, say, an £80 contribution to £100. Higher-rate taxpayers can claim extra relief through their tax returns, potentially reducing the cost of a £100 pension contribution to as little as £55.
In a nutshell, landlords can cash out their properties and then transfer these proceeds (either as cash or REIT shares) into SIPPs, generating tax relief on these contributions. The proceeds can then grow tax-free inside this tax shelter, rolling up tax-free dividends and capital gains over the years ahead.
Landlords who own buy-to-let properties via limited companies can avoid the usual corporation tax of 20% charged on capital gains by exchanging their company shares for trust shares. These share swaps do not trigger CGT, so landlords can defer this tax bill until they later sell their REIT shares. In addition, since there is no CGT to pay on share exchanges, the trust will pay 'above market value' for limited companies acquired through such swaps.
What about the drawbacks?
If you are a landlord with multiple properties, the net value of your portfolio could be in the hundreds of thousands - or even millions - of pounds. As UK residents can put a maximum of £40,000 a year of taxable income into pensions, this creates a problem.
Nevertheless, would-be landlords looking to sell out to Mill Residential can gain extra tax relief by 'carrying forward' previous years' unused pension allowances. Also, property portfolios jointly owned by spouses allow both partners to contribute to their own SIPPs. So it is possible to boost each partner's contribution to a SIPP to as much as £190,000 in a single tax year.
Of course, by swapping your portfolio of properties for shares in this REIT, you hand over ownership of these particular buildings to Mill Residential. In return, you get shares with exposure to a much larger and more diverse property portfolio, but one that may produce inferior future returns than your existing physical holdings.
Conversely, owning shares in this REIT means you can sell out gradually and as you wish. This makes it much easier to reduce your exposure to the property market, without the burden of selling properties one by one. Similarly, swapping property for REIT shares means you give up the chores of managing and letting properties, but remember that SIPP and REIT costs will eat into your yearly returns.
This exercise is not one for landlords to undertake lightly. But if you're looking to get out of the buy-to-let market, retire or grab some serious tax breaks, this REIT may be well worth investigating.
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