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Residential Properties and SIPPs
Richard Millson, a partner in our Leeds office, answers questions on residential properties and SIPPs.
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This article is reproduced by the kind permission of the Yorkshire Post and first appeared in the issue of Saturday 19 February 2005.
1. What are SIPPs?
Self Invested Personal Pensions, or SIPPs as they are commonly known, are individual pension arrangements offering a wide range of investment opportunities. SIPPs have been around since 1989 and have always been allowed to invest in commercial property, such as offices, shops and industrial units, but to date have not been permitted to invest in residential property. This is set to change from April 2006 [STOP PRESS: IMPORTANT CHANGES - please follow this link for details].
2. How does a SIPP work?
A specialist consultancy firm or an insurance company normally carries out the administration of the SIPP and acts as the Trustee. However the choice of investments lies with the member who can either manage his own investments or appoint a specialist advisor. Care is needed in choosing a SIPP provider as some will impose an extra layer of restrictions on investments on top of the rules laid down by the Inland Revenue.
3. How do I set one up?
You would go to an administrator such as ourselves and they would set one up for you. You can then take control of the investment. The set up fee should be about £600 with an administration fee of about £560 a year.
You would need an amount of money, which you could transfer from an existing personal pension, to start with if you want to buy property.
4. Can I have a SIPP and still pay into an employer's pension?
At the moment rules dictate that you can't have both a personal and a company pension, but from April 2006 you can. So you will be able to continue with an employer's scheme and set up a SIPP.
5. Is there a minimum/maximum amount I can invest?
At present the maximum contribution is restricted to an age-related percentage of the member's earnings (subject to a limit on earnings for this purpose of £102,000). After April 2006 a member will be able to pay up to 100 per cent of his earnings into a SIPP regardless of age (subject to a limit of £215,000). Alternatively, a company contribution of up to £215,000 can be paid regardless of the member's earnings. All contributions qualify for tax relief at basic rate, with higher rate tax payers being able to reclaim the extra relief through their tax return. It is also possible to transfer funds from existing pension arrangements into a SIPP.
There is no minimum level of contribution.
6. What are the advantages of investing in a SIPP?
Any income arising on the SIPP assets is free of tax, with the exception of dividends on equities, and similarly any capital gains made on the assets are tax free. Allied to the tax relief on contributions, this means a substantially greater fund could be built up within a SIPP than if the member were to take the amount of the contributions as taxed income, and then pay tax again on the investment income and gains.
7. Will the asset be locked away until I retire or will I be able to access the money?
Currently the earliest age at which a member can access the funds is 50, except in circumstances of ill health. At that time 25 per cent of the fund can be taken as a tax free lump sum, with the balance being used to provide a regular income or pension. This pension is subject to income tax and the amount of the pension which may be withdrawn is determined by factors based on the cost of annuities. The minimum retirement age will increase to 55 from 2010.
8. When can my SIPP buy residential property? [STOP PRESS: IMPORTANT CHANGES - please follow this link for details]
From April 2006 a SIPP will be permitted to purchase residential property. This could be let purely on a commercial basis or could be used by the member or his family. For example, a member could buy a holiday property, letting it commercially for most of the year but taking a number of weeks holiday himself in the property. This would be permissible provided the member paid the market rent for the times when he was using the property. The SIPP could also buy a property for the member's children to use whilst at university, provided again that a market rent was paid.
9. What about property abroad? [STOP PRESS: IMPORTANT CHANGES - please follow this link for details].
SIPPs will also be able to purchase residential property overseas. Specialist advice will be required to ensure that the tax advantages attaching to the SIPP are not negated by any taxes levied by the country in which the property is located.
10. I already have a second home - can I put this into my SIPP? [STOP PRESS: IMPORTANT CHANGES - please follow this link for details].
Yes - after April 2006 it will be possible for the SIPP to purchase a property from the SIPP member or his immediate family. The market price must be paid for the property. This will allow the member to free up the cash which was previously tied up in the property but still have use of the property subject to paying a market rent. There may be Capital Gains Tax considerations for the member on the sale of the property to the SIPP.
In effect you can't just put an existing property you own into a SIPP, you have to buy it with money in the SIPP.
11. How much can my SIPP invest in a property? [STOP PRESS: IMPORTANT CHANGES - please follow this link for details]. The whole of the SIPP funds can be invested in one or more properties. In addition, the SIPP is permitted to borrow funds from a bank or other commercial lender of up to 50 per cent of the amount of the fund. A SIPP with £200,000 of assets could therefore borrow £100,000 and purchase a residential property worth up to £300,000.
12. What if I want to purchase a larger property than my SIPP can afford even with the borrowing? [STOP PRESS: IMPORTANT CHANGES - please follow this link for details].
It is possible for a group of SIPP holders to pool together their SIPP assets to jointly purchase a property. A legal agreement would be drawn up setting out the proportion of the property owned by each of the individual SIPPs.
13. What is the difference between a SIPP and a PIF?
A Property Investment Fund (PIF) was a 2004 Budget proposal outlining the Government's ideas for a new form of property vehicle. It is intended to allow small private investors access to investment in the property market by purchasing units along with other investors in a shared fund. It is unlikely to share all the tax advantages of SIPP.
14. Would you advise a client to invest in a SIPP or stick to a more convential pension?
Many investors have become disgruntled with insurance company pensions due to the poor returns on their investment funds. A SIPP puts the control of the investments in the member's own hands - he can use the SIPP to invest in equities or choose from literally hundreds of professionally managed funds. In our experience though it is property that is the key attraction for many SIPP holders and with the advent of residential property we expect the demand for SIPPs to increase sharply in the run up to April 2006 [STOP PRESS: IMPORTANT CHANGES - please follow this link for details].
This article is reproduced by the kind permission of the Yorkshire Post and first appeared in the issue of Saturday 19 February 2005.
Richard Millson, February 2005.