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SIPPs:
A way to invest in property for your UK pension
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If
you are a UK resident, you will probably already be
aware of Self-Invested Personal Pensions (SIPP). From
April 2006, changes in UK pension legislation will
enable investors to also invest in residential property
as well as overseas holiday properties. Investors will
also have the possibility of borrowing up to 50% of
their existing fund as part of the finance.
Here is our 60-second guide:
What is a SIPP?
A SIPP is a self-invested personal pension that allows
an individual to manage his own pension. Previously only
utilised by the very rich, a change in Inland Revenue
pension rules from 6 April 2006 means that anyone who
sets up a SIPP can invest in a wide range of items,
including residential property in the UK or overseas.
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What are the
benefits of having a SIPP?
Tax relief. All UK pension contributions attract tax relief
and for every 78p paid into a pension scheme the government
pays in 22p. Additionally, higher rate taxpayers receive an
extra 18p in every £1, meaning they would receive 40p in
every £1 or 40% tax relief on any property bought.
Who benefits the most?
Higher rate tax payers (those who earn in excess of £32,400)
will benefit most but everyone will benefit from 22% tax
relief, meaning if a client buys a property priced £100,000
through his SIPP it will only cost him £78,000.
What regulations are there?
Number one is that any property bought via a SIPP will be
owned by the SIPP and not by the individual although he can
be the beneficiary of the SIPP once he reaches 50 years of
age or 55 from 2010.
Can the owner use the property himself?
Yes, the property may be used by the individual as long as
he pays a commercial rent in the same way anyone else using
the property would.
Are there any other qualifying conditions?
If the property is sold the individual will not be able to
access the cash until he is 50, or 55 from 2010, when he
will be able to take out 25% of the fund as a tax-free lump
sum and the balance to produce a taxable income.
Are taxes, including Capital Gains Tax (CGT), payable?
Not in the UK. However, if the property is abroad, you will
have to pay local tax on rental income and should the
property be sold, CGT if it is applicable in the country
where the property is located.
Are there any other issues with SIPPs owning a property
abroad?
Some countries, including Spain and France, recognise
individuals and companies being able to own a property but
not a trust, which is effectively what a SIPP is. The issues
surrounding trust status and property ownership overseas, we
are told, will be clarified prior to A-Day.
Can a SIPP borrow money?
Yes, the SIPP will be able to borrow, subject to status, up
to 50% of the value of the fund. For example, if you are a
lower rate taxpayer and want to purchase a £100,000 property
you would need to raise £78,000 (22p in the £1 is the tax
relief), 50% of which (£39,000) may be borrowed against the
SIPP.
How can I pay into a SIPP?
You can contribute the equivalent of all your earnings to
the SIPP up to a maximum of £215,000 per year and £1.5
million in a lifetime. Also, you can begin contributing to a
SIPP now ahead of the 6 April 2006 commencement date.
Who administers a SIPP?
A SIPP is regulated by a manager (effectively a trustee of
the pension), whose legal responsibility it is to ensure
that the SIPP (and therefore the property) is run properly.
Can I transfer my current personal pension into a SIPP?
Yes, you may transfer your existing personal pension into a
SIPP; the SIPP provider will administer the transfer that
they will then manage on your behalf.
How much do SIPP providers charge?
It varies, but if an individual has approximately £100,000
in the fund between 0.5-1% of its value per annum is the
going rate.
Can I transfer my current overseas property into a SIPP?
Yes, although the SIPP will have to buy it from you
personally, meaning CGT is likely to be payable on any
profit. It may, however, be financially worthwhile doing so.
Seek independent financial advice, bearing in mind that
stamp duty and other legal and financial fees will be borne
by the SIPP and need to be factored into the costs.
Are there any special rules regarding off-plan purchases?
Yes, off-plan purchases made by an individual now can be
transferred to his SIPP after 6 April 2006, enabling you to
take advantage of the potential capital gain between now and
A-Day.
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