Property or investing? How to save huge amounts in tax...

For example, in the last 20 years the MSCI world index has provided over four times the return of the UK property index [1]. An investment portfolio also comes with the added benefit of providing greater liquidity and tax planning scope which are key factors when considering the best route to provide an ongoing income.

Whilst we could explore numerous attributes of each position, we have delved into the workings of the two investment strategies when utilising them for income purposes below.

Example scenario:

Joe – He is weighing up the prospect of investing £500,000 in an additional property, he only owns his main residence separately.

Diana – She is a client who alternatively wants to invest £500,000 of capital and work closely with a financial planner to structure the investments in various tax vehicles. I have kept the products simple.

We have assumed Joe and Diana are both higher rate taxpayers and they receive an existing income of £80,000 each.

Initial costs

The initial charges associated with an additional property purchase are often overlooked when comparing against investments. We have not gone into specific detail on the individual costs associated with a property but highlighted the two most expensive outlays, generally.

Joe

As this will be a further property, the additional stamp duty rates will apply.

*Stamp duty land tax calculator [2]

Diana

This will very much be driven by the complexities of the advice, and it will vary, but we would expect the initial advice fee to vary between 1-2%.

As highlighted above, there is a significant difference in the initial fees and tax due of £20,000 on a worst-case basis, this represents 4.00% of the planned initial investment. As stated, there are a host of other costs to factor in with the property, including maintenance.

Ongoing costs & tax

We have then compared and analysed the ongoing costs and tax implications of both scenarios.

Joe

Joe is expecting to earn a respectable yield of 6% from this property, which will provide him with £30,000 gross pa. We have ignored potential increases in the initial values of the property and investments for the purpose of showing the different tax treatment when relying on each investment type for an ongoing income.

*letting agent fees range from 10-20%, so we have used the median figure [3].

As highlighted above, once taking into account management fees and the tax, the yield is substantially reduced.

In addition to this, the rental income Joe will receive will push his income in excess of £100,000 which means he will start to lose his personal allowance. For every £2 of income over £100,000 the personal allowance of £12,570 is tapered by £1 [4]. This would mean Joe is effectively paying 60% tax on this element of income that no longer falls within his personal allowance.

Diana

For Diana, to keep matters simple we have assumed the £500,000 will be invested as follows:

Each product above is treated differently for tax purposes. ISAs are exempt from income and Capital Gains Tax (CGT) but have an annual subscription of £20,000. GIAs are subject to Capital Gains Tax on any gains crystallised above the CGT allowance of £3,000 (as of 09 May 2025) but no income tax is payable when withdrawing capital. There is however income tax payable on any income generated from the underlying holdings. An offshore bond allows for income of up to 5% of the original amount invested to be withdrawn each policy year without creating a chargeable tax event, it is also cumulative.

One product that is not mentioned above is a pension and we will highlight this further on in the article, but this has been excluded in this scenario due to the age restriction that applies when accessing a pension. [5]

We have replicated the same £30,000 income that Joe is receiving through the rental property by withdrawing a specific income from each product that supports their structure.

*This assumes that the offshore bond withdrawals are return of capital and this is drawn every year over a period of 20 years until the client has received their full original investment back through withdrawals

You should notice that the investment position provides a greater income of £14,700 pa, with no income tax paid on the withdrawal. By paying no tax whatsoever or even just limiting the tax paid, this avoids putting too much pressure on a particular vehicle to provide the income required which in turn aids ongoing sustainability.

What does this look like over a 10-year term?

Over ten years, Joe, the property investor, will pay £147,000 more in tax. It is a huge difference! The gap only widens as you increase the initial investment depending on how well structured the investments are, this is why it is so important to work with a financial planner over the long term to build a tailored strategy.

It is important to emphasise that this is fairly basic tax planning, and we would assess each position in great detail to determine the most effective strategy.

Disposals of a property vs investment portfolios

As with any investment, a vital consideration will be what the tax position will be on disposal, especially if profit is being crystallised.

Any gains that are made on additional properties are subject to CGT. Each individual is currently entitled to a Capital Gains allowance of £3,000 in the present tax year, which is half the allowance of previous tax years.

Property is subject to the same rates of CGT (in excess of the CGT allowance) as investments, such as a General Investment Account (GIA). ISAs, bonds and pensions are exempt from CGT, so you can often save a huge amount of tax by structing capital in different products. We have summarised the position below:

* [6]

In summary, investments tend to provide much wider choice and flexibility when it comes to crystallising gains due to the greater liquidity and diversification options. This is why it is so important that advice is taken when looking to manage and mitigate your CGT liability.

Further tax planning

Pensions

Although excluded in this example, pensions may play a significant role in an individual’s investment portfolio for many reasons. Pension contributions are an extremely powerful tool in contributing to wealth accumulation as they benefit from tax relief, they are also mostly exempt from inheritance tax.

Let’s assume Diana funded pension contributions separately and her existing £80,000 of income was classed as pensionable earnings. We could look to reduce Diana’s existing income position down to the basic rate threshold for tax purposes. We would do this by making a £30,000 gross personal contribution, which would cost Diana £24,000 upfront.

*This is often claimed through self-assessment if made via the relief at source method.[7]

The table emphasises how the tax relief applied is substantial, especially if this is repeated each tax year. If we forecasted this over a 10-year period, it would result in an increase in wealth of circa. £119,460, all paid through tax relief.

Please be aware that the rules surrounding inheritance tax and pensions may alter in April 2027, as stated in the 2024 Autumn Budget.[8] Financial advice is pertinent to understand these changes and identify whether a change to your retirement planning is required if they come into effect.

Inheritance tax (IHT)

Most people that hold property as part of their retirement or investment strategy come to the point where they start to think about inheritance tax planning. Property makes it increasingly difficult to mitigate IHT as your options are limited to either selling or gifting it away. Due to its illiquid nature, it makes it very difficult to carve up and gift parts of a property gradually, so it is often all or nothing and any control is completely relinquished on gifting the asset. Furthermore, upon gifting a property, then you will be treated in most scenarios as making a disposal for Capital Gains Tax purposes and this can trigger a significant tax bill.

Investments on the other hand allow for fluidity in terms of enabling several options that align with individuals’ goals and circumstances. This could be anything from retaining access, preserving an element of control, or just gradually passing wealth over to avoid one large capital gift that can be overwhelming. There are numerous options we have at hand and the following are the most common: general gifting, trust planning, pension planning, business relief and just spending it!

Conclusion

In conclusion, both property and investment portfolios offer unique opportunities and diversification across both asset classes can be a prudent strategy for building a resilient plan. However, we would recommend you do not discount utilising an alternative approach such as a well structured investment portfolio as this article highlights the huge potential tax savings that can be achieved through working with a financial planner on an ongoing basis.

Please note, you need to be aware of the risk associated of any investment as with both investment opportunities, you could get back less than you originally invest. You should always seek advice from a professional.