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PROPERTY
You buy commercial property (e.g a shop, offices, warehouse, factory) which is already let on a lease to a tenant or tenants and you receive rent as an income. A commercial lease usually provides for rent reviews every 3, 4, 5 or 7 years depending on the lease, at which time you may be able to negotiate an increase. You can borrow all or part of the money you wish to invest and interest on the money borrowed is eligible for tax relief (since 6 April 1995 including property abroad) though only against rents from the property you buy and other property you own.
Who can invest Anyone 18 or over.
How worthwhile Potentially good value for taxpayers who don't want to sacrifice current income but want protection against inflation. In the past commercial rents have usually kept up with inflation and in some areas exceded it. Commercial property within the means of most investors is called secondary property; it is located in less good locations, is often let to small businesses who may not always pay the rent and where there may be difficulty finding a new tenant if premises are vacated. To compensate secondary property shows a better return than primary property. Before tax rental returns of 10% on the initial investment can be found. When you sell, if the rents have gone up, you can also expect to make a capital gain. Too expensive for non-taxpayers and 20% taxpayers.
Minimum £30,000 upwards. Less if you borrow to buy.
Maximum None.
Suitable Lump sums.
Money back You can sell your property when you wish but finding a buyer may be difficult. Sometimes a tenant or adjoining landlord will be interested or someone may approach you.
Interest You get an income from the rent. This can be paid by standing order or you can employ managing agents to collect it for 10%-15% of the rent; they will also act as a buffer between you and the tenants. Rent reviews usually provide increases or you can put fixed increases in a new lease.
Interest paid Usually quarterly or monthly. Best to get small tenants to pay by monthly standing order.
Tax Rent after deduction of expenses (e.g. interest, agent's fees and repairs not paid for by tenants) is liable to income tax. Basic taxpayers pay 22% tax on rental income. No tax is deducted unless you live abroad; taxpayers have to pay later. See also tax on rents. When you sell or give the property away, the gain is liable to capital gains tax.
Fees to pay Legal costs when you buy or sell of £600-£2,000. Since 28 March 2000 when you buy for purchases £60,001 to £250,000 1% stamp duty; £250,001 to £500,000 3% stamp duty on whole price; over £500,000 4% stamp duty on whole price.. Estate agent's costs for negotiating rent review or new lease, 10% of rent. Agent's costs when you sell 1%-2%. VAT on all except stamp duty.
Children Normally unsuitable; property may be held by a trust.
Risk Moderate. The investment is not easily sold so you should only put in money you won't need for a long time. If tenants stop paying rent, you may have extra legal expenses.
How to invest Advice from commercial estate agents in the locality you want to invest in. Look for adverts in newspapers - and magazines like Estates Gazette.
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Last updated 20 June 2003