For example, in the last 20 years the MSCI world index has provided over 4 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, I 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. I 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. I 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 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 6 April 2024) but no income tax is payable when withdrawing capital. There is however income tax payable on any income generated from the underlying holdings. A 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 I 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 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.