Commercial property funds can now be included within an ISA or personal equity plan (PEP) wrapper for the first time. This means that investors can have direct exposure to bricks and mortar investments in a tax-efficient way. Previously they could only gain property exposure in ISAs through the shares of property companies.
The shake-up of the ISA rules follows the decision to allow real estate investment trusts (REITs) to be included in ISAs and PEPs from January 2007.
Commercial property could be an option if you are looking for a diversification tool in ISAs and PEPs as they have little correlation with the stock market.
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Commercial property funds must pay 20 per cent tax on income received from rentals, which cannot be reclaimed by ISA managers. Basic rate payers will therefore make no income tax saving by holding these funds in an ISA, although they will avoid capital gains tax.
Higher rate taxpayers, however, must pay an additional 22.5 per cent income tax on the gross income so by holding these funds in an ISA or PEP they could avoid this additional liability.
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