Now individuals will not be able to hold residential property (UK or Overseas) inside a pension. At the same time antiques, fine art and other so-called “exotic investments” were also removed from the list of proposed investment.
Who was responsible for the SIPP hype?
The blame has to be laid on UK & Foreign property developers, financial advisors and the financial press that lapped up the exaggerated and misguided information.
The result is as many as 30,000 off-plan apartments have been bought either through SIPP’s, or outside SIPP’S for transfer in after 6th April 2006.
The end result is that those holding within SIPPS will have to sell before then and those outside SIPP’s are now facing losing deposits of up to £30k, rather than complete on these apartments.
There was simply too much focus on the tax relief and not enough on residential property as an investment alternative, to shares or bonds.
This emphasis became so great that the Treasury could not ignore the fact that this was bound to lead to massive mis-selling, masking the fact that the whole reason behind SIPPS was supposed to be as a pension for retirement.
Instead, it was being turned into a marketing opportunity; for both developers and financial advisors.
Their motivation was to sell products, especially off-plan properties, both here in the UK and Overseas.
What was the big SIPP hype all about?
One of the typical headlines was as follows: “Now you can buy a £200k property for just £120k”! The adverts purportedly demonstrated that if you invested £200k into a SIPP you would get 40% tax relief. This meant that £80K was put back into your pension fund by the government and your contribution was just £120k!
However, many of the adverts also failed to point out that if you made such a large contribution you would have to have income in that tax year equal to it. So, if you were earning £200k per annum you could benefit, but you would have to pay all your annual income into a SIPP, a rather unrealistic prospect!
The opportunity was really for those with existing large pension funds. They could make further proportionate contributions to a SIPP giving them a fund large enough to purchase a good residential property.
In contrast, someone earning say £60k with no prior pension fund would actually need to take 3-4 years of making say £10k annual contributions before they would have enough to purchase even a modest residential property within the SIPP.
We have been here before with pension funds!
In the 1970’s, Small Self Administered Pension Funds (SSAP’s) were first introduced for private companies.
Shortly after their introduction there was wide scale abuse where large foreign villas, paintings, vintage cars, jewelry, were all being placed in these pension funds: Sound familiar?
Yes! Those are all the items you were supposed to be able to place inside a SIPP as well. What happened to these pension funds?
Well, the Revenue formed a Special Investigation Unit and one by one, all these schemes were closed down and all the tax relief clawed back, plus substantial interest and penalties paid.
So after the U-turn are there any opportunities for holding property inside a pension fund?
The short answer is yes!
Two good tax saving opportunities – but you must be quick!
There are two good opportunities for holding property within a pension fund.
The only problem is you need to set up that pension fund and get the property purchase in place before April the 6th 2006.
1: The ‘Special Executive Pension Fund’.
The first opportunity is to establish a special type of executive pension fund that can be set up for the directors and employees of any limited company including an investment property company.
Up to £500,000 a year can be contributed into this pension fund with full relief against corporation tax.
This pension fund will become a SIPP on 6th of April 2006, when the pension rules change, but before this change takes place you can purchase commercial property in this type of fund.
What’s the big benefit about the special executive pension fund?
Well, the benefit is the opportunity to borrow 75% of the property value, if the property is purchased before April 6th 2006.
After April 6th 2006, only 50% of the value of the pension fund (as opposed to 75% of the value of the property!) may be borrowed to purchase commercial property.
This means that a £250,000 investment (before tax relief) into a special executive pension scheme enables a £1million pound commercial property to be bought by the scheme.
(There is actually the same opportunity to use a SIPP for personal pension contributions, but the limitations are much greater. The maximum contribution would be 17.5% to 40% of £105,600.00 depending on your age. That is the current annual pension cap. Again, if this is done before April 6th 2006; 75% of the property value can be borrowed.)
2: Offshore Funded Unapproved Retirement Benefit Scheme (Offshore FURBS)
Secondly, if somebody really wants to own that overseas villa in a pension fund, there is still an opportunity out there.
The Offshore FURBS is a very special type of pension fund where the rules are different to any normal pension fund.
Again, before April 6th 2006, contributions by a company of any amount into such a scheme are effectively tax deductible.
However, there is a downside. Any payments made into the fund are taxable on the employee as a benefit in kind at up to 41%.
However, if this is thought through carefully, an individual only needs to have the company put in enough money to buy a property with a mortgage so effectively only 25% of the property value. Although, there are no limits and if an 85% mortgage can be obtained, then only 15% of the property value needs to be placed in the FURBS.
There is usually a company and possibly an offshore life bond into which the FURB will invest the money and through which the property will be bought.
Correctly, structured, there will be no capital gains tax on the sale of the property, except local capital gains tax in the country where the property is situated.
All the value of the FURBS can in the future be paid as a lump sum, rather than a yearly pension or loaned back to the pensioner. Again with good tax planning this could be totally tax-free.
Another key benefit of is that these funds are outside the scope of inheritance tax for contributions made before April 6th 2006.
FURBS are a very useful wrapper, but they normally need a little more sophistication than just a simple set up of a fund and therefore have higher initial and ongoing costs.
So, they really are for higher value property or someone who wants to hold an exotic investment such as, antiques or art.
A final word of warning - any benefits you get from occupying the overseas villa personally, will have to be paid on a benefit in kind basis, at the market value to the Revenue!
If so many people had not been blinded by the SIPP hype; they would have been seriously looking at Special Executive Pensions and possibly Offshore or Onshore FURBS; as a means of satisfying their property ambitions for retirement.
Actually, it is still possible for those prepared to act quickly, to set up a pension fund with a valuable property asset within it.