Welcome to our first bulletin of the 2006/7 tax year. The last minute rush to maximise ISA and pension contributions and to use capital gains tax allowances etc has passed and Gordon Brown’s Budget has thrown the life assurance industry into some confusion regarding the tax treatment of certain trusts, popular in inheritance tax planning.

And, if all this wasn’t enough, on 6th April the rules and regulations governing pensions have been “simplified”. For further information please click here to be taken to our full Pensions Simplification Bulletin.

Other changes include the facility from 6 th April for commercial property funds to be included within ISA wrappers. This, together with the introduction of new Real Estate Investment Trusts (Reits) from January 2007, has seen the choice of funds giving access to commercial property, either through bricks and mortar investment or through commercial property shares, widen quite significantly.

What are Reits?
Reits are a well-established means of investing in the property market in many countries. They operate just as ordinary investment trusts do, pooling investors' money and then investing it for them, in this case in commercial and residential property.

In the UK, there are already a number of property funds (operating both as unit trusts and investment trusts), but the Government's decision to introduce Reits is still causing some excitement thanks to the fact that they are both more tax-efficient and more flexible than conventional funds.

The UK's current crop of investment funds face restrictions when it comes to buying commercial property in that they must have at least 20% of assets in property shares (rather than actual bricks and mortar) to help ensure that there is sufficient liquidity.

What are the tax advantages?
When UK investors buy shares in property companies at the moment (either directly or through a pooled fund, such as a unit trust), they face the same potential ‘double taxation' that any equity investor faces: companies pay corporation tax on their profits, then the individual shareholder pays tax again on their dividend income or any capital gains in excess of the CGT allowance.

Within a Reit, by contrast, rental income and profits from the sale of assets are free of tax, on condition that the fund distributes at least 90% of its earnings to its investors in the form of dividends.

This privileged tax status means that Reits are, in effect, quoted companies that don't have to pay corporation tax. This in turn means that a great many listed property companies can be expected to convert to Reit status once the new regime is introduced here in the UK.

When will Reits be available?
First proposed as long ago as Budget 2004 and much consulted upon since, the statutory regime for UK Reitss will finally be enacted in Finance Act 2006 and will go live on 1 January 2007 when companies and groups will be able to elect to join the regime.

There will be a conversion charge of 2% which may be spread over 4 years, for property companies deciding to become Reits which seems to be generally viewed as an acceptable charge for accessing REIT benefits.

Three main sectors make up the commercial property market: retail (shops, supermarkets, shopping centres and department stores), offices (including business parks) and industrial (industrial estates and warehouses). Investors achieve a return on commercial property through:

• An increase in the capital value of the property
• A regular income through rent received
• Added value initiatives such as new lettings, renewing or extending leases, refurbishment and redevelopment

There are several reasons to invest in commercial property as part of a balanced portfolio, including:

• Diversification – commercial property is a proven method in achieving diversification as it has a low correlation with returns from equities and bonds, and therefore helps smooth out investment returns.
  
• The potential for a steady income – property provides a relatively stable income. It has consistently yielded more than equities and bonds over the last decade, however past performance is not a guide to future performance.
  
• Low volatility – returns tend to be less volatile than those from equities. This is because rental income drives returns. Rental income has proved to be more stable because, generally, leases are long and rent reviews put rent up, not down.
  
• Tangibility – properties are a tangible asset, unlike equities or bonds. Even if tenants move out, the property remains an attractive resalable asset.

The value of an investment in a property fund and the income derived from it can of course fall as well as rise, particularly in the short term as can investments in equities. Property funds may carry the additional risk of being illiquid and your investment may not always by easy to realise.

For most investors, the only way to access commercial property is through pooled investment funds, such as the New Star Property Fund or the Norwich Propety Fund, both of which are currently on our “Buy List” within the Tailored Asset Management service.

Recently a number of new commercial property funds have been launched by investment companies with successful track records in this field through pension and life assurance products. These include funds launched by M&G, Standard Life, Legal & General, Scottish Widows and Fidelity. The extent to which these funds hold bricks and mortar assets or property shares varies as do the global property markets in which they have exposure.

We are currently undertaking a review of the available funds which may result in changes being recommended to existing clients’ portfolios. We will be in contact with you individually if this is the case.

Why wait almost twelve months to maximise your ISA allowance when you can invest £7,000 now and enjoy tax favoured investment from now on? A couple can invest up to £14,000 into maxi-ISAs investing in equities, fixed interest funds or, now, commercial property enjoying tax free capital gains and interest and with no personal liability to income tax on dividends.

The ISA allowances are only guaranteed to apply until 2010. If you would like to invest now and maximise the tax advantages please contact us.

Finally, you may be interested to know that we were featured in the April edition of New Model Adviser magazine, a publication which highlights those advisers who have changed their business model from the traditional life assurance and pensions sales and advice model to a far more client focussed approach which is geared to the clients attitude to investing and building a long term advice based relationship. We now have more than 200 clients within our Tailored Asset Management service, which is our “new model”. Please click here to read the article which we hope you find interesting. It is thanks to you, our existing clients, that we have achieved this success. THANK YOU.