What is a Property ISA?

A property ISA is not a type of ISA as different types of ISA wrapper can be used to house property or property-backed investments. Property ISAs can be a means for those who wish to access the rewards that come with property investing without the need to invest directly into a single property.

A number of Innovative Finance ISA providers allow UK individuals to invest in property transactions. This means an investor can access potential returns from the UK property market in a tax-free way. See below for a list of the current crop of innovative finance ISAs which invest in property development or property loans.

Compare Property Investment Innovative Finance ISAs

The Types of ISA

Property within a Stocks & Shares ISA

The ISA’s tax-free credentials are again valuable in the case of Stocks & Shares ISA investors, who are able to receive dividends and capital gains tax-free.

Property-focused investments which can be placed inside the Stocks & Shares ISA include investment trusts (including Real Estate Investment Trusts, or REITS), property bonds and a range of structured products.

There are a range of funds which invest in property stocks or property directly and this research from Hargreaves Lansdown has an excellent overview of what isa available.

Property within a Cash ISA

Whilst Cash ISAs are by their nature purely for cash investing, the introduction of the Help to Buy ISA – an annex to the traditional Cash ISA perhaps – does allow cash savers who are seeking to deploy their cash into a property at some point in the future. The Help to Buy ISA is for first time buyers only.

An alternative for first time buyers exists with the the Lifetime ISA. This is available for those aged 18-40 and also obtains a 25% top up from the Government, up to £1,000 per tax year. Alternatively the money saved can be used once the investor is aged 60 and above.

When saving to buy a home, it is useful to also have instant access to cash savings when needed, so ensure you understand the terms of any fixed-term savings or investments.

Property within an Innovative Finance ISA

The Innovative Finance ISA allows investors to invest in property-backed peer-to-peer loans, including residential buy-to-let mortgages, bridging loans and property development loans. The peer-to-peer lending platform may offer to automatically deploy your investment funds across a variety of property-backed loans, or it may alternatively allow you to select individual property transactions that you would like to provide funding towards.

Is it risky to invest in a Property ISA?

As with all forms of investing, your capital is at risk.

Peer-to-peer lending – the form of investing which sits inside a property IFISA – is not covered by the Financial Services Compensation Scheme (FSCS), meaning that there is no formal government protection for the investor in the event of borrower default. Watch out for property-backed peer-to-peer loans that benefit from a charge over the underlying property – or similarly, personal guarantees provided by the borrower.

Different IFISA providers will have different approaches to managing risk – some, for instance, provide in-house ‘reserve funds’ which are designed to protect the lender in the event of borrower default. Be sure to check the individual approach to risk that each property-oriented IFISA provider takes. A list of some of the top IFISA providers can be found here.

Within Stocks & Shares ISA investing, certain investment trust classes – such as REITS – are not covered by the Financial Services Compensation Schemes. This is also the case for property bonds. Furthermore, in the event that a trust reports an operating loss, dividends may not be paid to investors and the value of the underlying trust may fall below the level at which you invested.

In almost all cases, your capital at risk and, whilst Cash ISA saving does receive some government protection in the form of Financial Services Compensation Scheme coverage, the Help to Buy ISA is intended only for first-time buyers who are attempting to save for their first deposit – not serial investors who are looking to acquire their second, third or fourth property.

Risks of Property Developments

Investing in property is not without the inherent risks of assets of this nature. Here are some of the risks that may need to be considered before investing:

These are just some of the common risks which can be encountered with a development project. Each company will have different macro and micro economic factors to mitigate and account for, some of which may be beyond their control.

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Are Property ISAs worth investing in?

Despite the risks inherent to collective property investing and peer-to-peer lending, there are a number of reasons why an investor might wish to consider in a Property ISA – particularly given the experience that many direct property investors are currently having in the Buy-to-Let market.

The tax-efficient nature of ISA investing is, of course, a major draw for many and the ability to invest in property-backed products whilst enjoying tax-free returns will be very attractive to a great many investors. ISA investing is, in relative terms, considerably more accessible in so far as one is not required to raise sufficient funds to buy a property outright in order to get involved in property investing under the ISA route. There are a range of property ISA accounts available and investors can get started from as little as £250.

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