General (main property discussion here) - property allowed within pension scheme

does anyone know about this?

apparently coming into effect soon - i take it it will be tax efficient (no income tax on the rents?)

i use a company to hold all my props at the moment - does anyone know if i'll be able to transfer these to a personal pension scheme if i want to?

thanks

steve

I think the term is SIPP. You can do this already with commercial property, although to make the most money you need to syndicate. WIth say 6-8 people with 100K you could finance several million easily. Buy a big commercial property in the right place and a long term lease to a high street chain, woolies, smiths etc you could make a fair amount of money. Commercial property is going up in value similar to Residential property, doubling every 7 years or so.

Resedential property comes in next april I think. There are firms already helping out with commercial SIPPs so I would think they are the ones to quiz about your properties.

The main idea is that you withdraw money from pension funds that are already in place to use as the deposits.

Gavin PS I am not an expert, I went to a tax seminar where the subject was discussed. Not having enough money in a pension I half switched off.

Your understanding is my understanding as well. However the only point I am not sure on is whether SIPPs come into force March 05 or 06.

Perhaps someone else can confirm.

In any case many believe that residential SIPPs will fuel house prices further.

I am pretty sure it's 2006

Right. Thanks for that Gavin. I personally believe that this will be a very interesting development. People are in general are not satisfied with their pension fund managers and therefore are likely to jump at the opportunity of investing into residential tax efficiently.

Julian

The new regulation is indeed planned for April 2006 – pending a Labour re-election of course!

Its not just resi property that will be allowed into your pension – all other assets will be too; wine, stamps, classic cars, paintings, you name it!

But there’s always a sting in the tail! At present you can use your pension fund to gear to 75% i.e. your pension contributes 25% and you get a mortgage for the 75% but under the new rules you will only be able to gear to 50% thus you will need more of your pension to buy less assets including commercial.

That being said you can already put residential property into a pension – a) use FURBS (Ltd Co only) and b) invest in an Irish pension which only allows resin to commercial!

Simply assuming that the new guidelines will allow tax free cash on your investment is simply not the case.

Firstly, of course your pension has to actually have the money in it in the first place and there are strict limits on how much can be invested at any one time, in any one tax year and now new rules mean that a pension can only have a maximum of £1.5m which isn’t a lot of property although this is likely to be indexed.

Then you have the fact that you won’t be able to transfer existing owned properties into a fund without effecting a sale i.e. stamp duty, CGT etc.

You can bet it won’t be easy to take them out or take the money either – just like any other pension find.

You will probably have to purchase an annuity at some point which are completely useless structures but if you owned the property outside of a pension you don’t have to.

Finally, this cautious note I took from Thisismoney.com is worth reading:-

… tax and accountancy specialists Grant Thornton warn the initiative could prove to be very tax inefficient, particularly if the asset is held long-term, and could even end up costing investors far more in tax than they had bargained for. For example, if you bought a property for £100,000 ten years ago, without using money from your pension, and sold it now for £250,000, you would be liable to pay capital gains tax* of 24% on the profit. This would work out to a tax bill of up to £36,000. In contrast, if someone used their pension fund to buy property, they could be liable for a tax bill of £45,000 – a difference of nearly £10,000. This is because although they could drawdown 25% of the fund tax-free, the balance of the pension fund is taxed as income at a rate of 40%. Mike Warburton, senior tax partner at Grant Thornton says: 'This calculation is based on higher-rate taxpayers but shows someone using their pension fund to buy property could face a tax bill of £45,000, based on an increase in value of £150,000. 'Although this does not mean investors should necessarily rule out using their pension fund to buy property, it does mean people should consider the figures carefully and be aware of the future tax liability.'

Regards, Lisa http://www.keys-property.com

Very interesting, particularly your last point (quote).

I take it from this that the trend will be for investors to use their pension funds to purchase new properties from the market, rather than reclassify their current assets.

This could mean even more of an upturn in property market activity, no?

Terry

Lisa,

I hope you type fast this was a whopper post! But very helpful.

Owen

Terry - yes, it's a big item for debate at the moment (whether this will drive up the property market even higher).

Does anyone know what size the typical pension fund is, as this will affect what types of property you can purchase of course?

I'm guessing the kinds of people wishing to take advantage of this aren't those about to retire, hence maybe the 35-45s in general.

What's a typical 45 year old likely to have stashed away? 15 years' worth of 2 grand a year, plus interest, etc, maybe £50k?

Leverage that at 50% as the rules allow and they'll only be in the market for a £100k property or less. Hence I'm thinking it will be the smaller / cheaper properties that will see growth?

Anyone?

Will

Thats right it is likely to be the sub £150k props that will benefit the most.

Julian

I wonder if any areas will benefit more than others. Perhaps SIPPs will take off quicker in london. Most trends start there. But then the yields are so low compared with the rest of the country? Who knows.

Terry