Property

Question 1

Explain four risks of buy to let property (8)

Answer 1

• interest rate risk
• mortgage cost increases
• market risk
• property value decreases
• Liquidity risk
• maybe unable to sell when needed
• income/tenant risk
• Void periods/ tenant default

Taxation
Legislation

Question 2

Costs associated with selling BTL property (3)

Answer 2

• legal fees
• estate agent fees
• mortgage redemption fee

Question 3

Six reasons why a property fund may hold large amounts of cash and impact on fund performance (6)

Answer 3

• hold cash to pay investors wishing to sell fund
• new property pending
• or just sold a property
• rental income yet to be distributed
• recent influx of investor money
• tactical positioning by the manager
• cash produces very small return
• reduces overall performance in a rising market

Question 4

Advantages of investing in a property fund rather than directly in BTL (5)

Answer 4

• diversification
• professional management
• less admin
• liquidity
• partial sale options
• regular investment options

Question 5

Reasons a fund manager may pick a property with a lower yield than another (3)

Answer 5

• linger lease/better terms
• better quality of tenant
• location/ potential for growth
• development opportunities

Question 6

Aims of a REIT (3)

Answer 6

• provide a liquid market in property investment
• that is widely accessible by the private investor
• and has a tax treatment closely aligned with those in place for direct investment into property

Question 7

Structure of reit

Answer 7

• must be closed ended
• must be listed on stock exchange
• since 2012 that can include AIM
• must be UK resident for tax purposes
• can only issue one class of share

Usually two separate elements for tax purposes:

1) ring fences property letting business - exempt from corporation tax
2) non ring fenced business offering other services eg property management. Profit and gains are subject to corporation tax

Question 8

Qualification rules for REIT

Answer 8

• 75%+ of companies total profits must come from ring fenced business (property letting)
• at start of each accounting period value of assets in ring fenced business but be 75%+ of overall assets of the company
• REITS can not have an excessive amount of debt financing (interest in debt financing must be 125% covered by rental income)
• if not then company taxed on excess interest
• 90% of rental profits must be paid out as cash dividends (or stock dividends in lieu of cash dividends)
• REIT must be UK registered/resident
• must be listed on a register stock exchange
• must be closed ended

Question 9

Internal Tax treatment of REIT

Answer 9

• at least 90% of profits from rental business (income) arising in each accounting period must be distributed as a dividend within 12 months of end of accounting period
• stock dividends can be issued in lieu of cash dividends
• property can be developed within ring fenced business providing it is for the purpose of generating future income I.e. it is added to property portfolio
• if property is developed to be sold for profit then corporation tax will be payable
• if developed for investment purposes then as long as three years have passed then tax exempt

Question 10

Investor tax treatment of REIT

Answer 10

• two elements
• payment from ring fenced business is treated as UK property income
• paid net of basic rate tax
• non tax players can reclaim it
• ISA investors receive it gross
• higher rate and additional rate payer may additional 20/25%
• dividend from non tax exempt element
• taxed as any other UK dividend
• £2000 div allowance
• 7.5%/ 32.5/38.1%

gains:
- gains in disposal are subject to CGT

Question 11

Factors which influence the returns of a commercial property fund (7)

Answer 11

• location
• type of holdings (retail, office, industrial)
• liquidity
• rental yield
• quality of tenant
• basis of rent
• Bois periods
• development opportunities

Question 12

Risks of a REIT (3)

Answer 12

• REIT subject to supply and demand / closed ended
• in a weak market may trade at a discount to the NAV
• stocks could become illiquid

Question 13

Risks of commercial property via a UT/OEIC on disposal (6)

Answer 13

• liquidity/ manager may not have enough cash to pay sellers
• manager may not be able to sell property
• which would be a disadvantage to other shareholders
• manager may move to weekly valuations
• manager may apply a fair value pricing
• or apply a dilution levy
• or a fund dealing suspension

Question 14

Why might investing in commercial property protect in a climate of rising inflation compared with bonds (7)

Answer 14

• market value of bonds decreases when inflation increases
• maturity value at redemption is eroded by inflation
• real value of income is eroded by inflation
• as both are fixed
• provides diversification
• opportunity for capital growth
• rental income is revalued upwards with inflation

Question 15

Conditions to be met for w fund to qualify as a PAIF (6)

Answer 15

• at least 60%
• of income
• must come from exempt property business
• value of property assets must be at least 60% of total assets
• shares must be widely held
• with no corporate investor
• holding more than 10% or more of net asset value

Question 16

Tax treatment of the three income components of a PAIF (8)

Answer 16

Div income

• dvi income paid gross
• and taxable at 32.5%
• above div allowance

Property Income Distribution

• PID PAIF paid net of basic rate tax
• higher rate/ additional rate due on anything
• after PSA has been used

Other income:

• Interest paid gross
• but taxable