The Tax-Efficient Method of Investing in Property in the UK and Abroad

Important Notice

In his pre-Budget report made in the Commons on December 5th 2005, Chancellor Gordon Brown has done a complete U-turn on plans to allow residential property to be purchased by a Self Invested Personal Pension fund (Sipp).

Two years ago Brown said that Sipps would be able to gain tax relief on residential property bought after April 2006. But now it seems the Chancellor has had a complete change of mind, with his announcement that "SIPPs and all other forms of self-directed pensions will be prohibited from obtaining tax advantages when investing in residential property."

Sweeping changes in UK Pension legislation are scheduled for April 2006 that may allow for investment property to be included within a Self-Invested Personal Pension (SIPP). This may include UK ‘buy-to-rent’ investment property on or offshore, and holiday rental investment property overseas – including Balearics property.

Please take careful note, however, that any property purchased using a SIPP must be a property that will earn an income for the investor.

However, the fantastic news is that we can show now how you can take early advantage of these significant changes now!

Self Invested Personal Pensions (SIPPs) have actually been available for many years, but with the changes that will take effect on April 6th 2006 – popularly known as ‘A-Day’ – they are set to become a much more attractive proposition. From ‘A-Day’, investment property for sale in the Balearics; anywhere else overseas, or in the UK may be allowed as an asset of the SIPP.

Consequently, there is a lot of excitement with respect to the exciting opportunities ahead, and so we have compiled a list of commonly asked questions from our customers to assist you in the understanding of this fantastic opportunity:

When is this going to happen?

The changes will be introduced on April 6th 2006 – known as ‘A-Day’.

Who will be eligible?

Anybody is eligible. If you have earnings or can transfer funds from existing pension arrangements, then you are eligible. (Please take independent financial advice).

How do I purchase a property?

• By using existing funds which at the moment may be tied up until you retire
• Mortgage of up to 50% of pension fund
• Company and/or individual pension contributions

From ‘A-Day’ – 6th April 2006 – annual contributions can be up to:

• 100% of earnings, if self employed, up to £215,000 tax free
• £215,000 company contributions regardless of earnings, if employed, per member. For example, a husband and wife investment partnership, if directors of their own limited company, can contribute £215,000 tax free each.

What are the benefits of using a SIPP?

• Rental income generated is free of UK income tax – paid gross
• The fund grows free of UK tax
• There is no UK capital gains tax upon disposal of property
• Outside of estate – free of inheritance tax
• Contributions into the plan qualify for corporation tax relief or personal tax relief at marginal rate: i.e. up to 40%

If a lump sum is invested, how can I benefit from personal tax relief?

You may invest, subject to maximum funding, and receive tax relief. For example:

• 22% tax reduction (40% if you are a higher rate taxpayer) when purchasing an overseas property for their fund: that means that a property costing £105,000 can be purchased for as little as £63,000

Do I have to pay stamp duty and local taxes if using the SIPP?

Yes, as there is no difference in this respect as if you had bought it personally – but it is paid out of your pension fund, along with other associated costs like professional fees and maintenance.

Are there any legal restrictions as to location?

No, but there are local restrictions until ‘A-Day’ on April 6th 2006. From ‘A-Day’, your off-plan investment in the Balearics, or in any other location, can be brought into your SIPP.

Who will own the property in the SIPP?

It will be owned by the trustees, who hold it for your benefit – but you remain the beneficial owner(s) under the rules of the SIPP.

Am I permitted to club together with others to buy property?

Yes, you are. (See previous comment about contributions). This is known as ‘Syndication’. You can purchase investment property for sale in the Balearics, any other overseas destination, or for ‘buy-to-let’ in the UK with:

• Your spouse
• Your partner
• A friend or friends
• Family member(s)
• Unconnected parties

Are there advantages to ‘The Family SIPP’?

• There are no minimum age restrictions
• A ‘Family SIPP’ can include family and/or friends

In many cases, this will form an essential part of IHT planning for UK and Worldwide assets.

Is it possible to form a syndicate to buy property of higher value, or even more than one property?

Yes. You can club together to buy property, and it is possible to borrow up to 50% of each individual fund.

Are there negative aspects to SIPPS?

• A SIPP is a pension, and so you cannot draw benefits under current rules until you are 50: it is not a liquid asset
• Personal use could create an income tax liability – unless you pay a market rent to your SIPP
• You are not allowed to ‘trade’ properties

How do we coordinate all of this?

Fully understanding this new legislation in order to take full advantage of what is undeniably a very exciting opportunity is no simple task! In order to help you with this, we have created a network of specialist advisors that cover the following areas:

• Independent financial advice
• Legal advice
• Tax advice
• Mortgage advice
• Property Finding: Sourcing ‘first phase’ ‘off-plan’ investment properties in the Balearics or any other location overseas or in the UK

What do I need to do now?

In the first instance we will put you in contact with one of our strategic IFA partners who will asses both your personal suitability and/or existing pension plan suitability. Our partners will offer you a FREE independent appraisal of your circumstances. Email us now pensions@escapes2.com

They will further help you with:

• Setting up your SIPP or ‘Syndicate Group Property Purchase’
• Arranging your pension transfers where suitable.(This can take up to 6 months)
• Arranging pension contributions