The Sky’s The Limit.
Forthcoming relaxation in pension regime could significantly benefit property investors according to Tim Jones, solicitor in the commercial property department of Mincoffs Solicitors LLP.
With relatively poor returns predicted on traditional forms of saving for pensions, many people are turning to alternative forms of investment which offer a higher yield on their assets. Increasingly, the population is instead speculating in real estate, both as a hedge against inflation and as a means of generating a steady income flow. Self Invested Personal Pensions or ‘SIPPs’, are individual pension arrangements which can be invested in a wide range of assets such as art and stocks and shares. SIPPs have always been allowed to invest in commercial real estate, but until now not in residential property. This situation is due to change from April 2006.
There are a number of advantages to be enjoyed in providing for retirement using SIPPs. Any investment income (other than dividends on shares and other equities) generated by the SIPP is free of tax; additionally any capital gains made by the ‘SIPP’ are also tax free. This is a tax efficient means of providing for a pension income whilst reaping the benefits of real estate and its proven potential to rise in value over the longer term, particularly for higher rate taxpayers, but also for anyone who has capital to sink.
From 6 April 2006, for the first time, a SIPP investor will be permitted to purchase residential dwellings. This broadens the scope for a pension portfolio or enables the “first opportunity” investor to begin at a modest level. The property could simply be let to produce a rental income or might be used by the SIPP member or his or her family as accommodation. The only stipulation for so long as the property is used for the personal enjoyment of the SIPP member or his or her family would be that a full market rent must be paid to the pension fund. The possibilities are quite exciting. A SIPP could be used to shelter a buy to let portfolio or to buy a holiday home, rent it out on a commercial basis for part of the year on a tax free basis, yet the SIPP member could still use the property for their own holidays.
Another inspiring change to the pension rules is that it will be possible to use SIPP capital to purchase existing residential property owned by the SIPP member or their close relatives, so long as full market value is paid. In some cases, this would allow the member to release equity in their own property, yet still enjoy full use, provided of course that a full market rent is paid to the pension fund.
The SIPP may use the entirety of its funds to invest in one or more properties. In addition, it can borrow funds from a bank or other commercial lender of up to half the amount of the fu
It is possible for a group of SIPPs to pool their assets together to enable the joint purchase of land and buildings. This is likely to be particularly attractive in the case of expensive real estate beyond the reach of a single SIPP. It is strongly emphasised that there should be an agreement drawn up amongst the members, regulating ownership and management of the property.
With the new potential for a SIPP to invest widely in residential property, we would expect to see a sizeable increase in the use of this mechanism as an investment vehicle after 6th April 2006 and many SIPP custodians are likely to be gearing themselves up for investment in residential property in the run up to the new 2006 tax year.
