Using a pension scheme for property assets
With the increasingly unfavourable tax treatment on the acquisition, renting and disposal taxes on residential property owned personally, Senior Tax Manager Richard Grimster and Financial Planning Manager Philip Sutton from Price Bailey cover some of the planning ideas linking properties with pensions to gain efficiencies.
Why have a Pension?
We often find that clients consider their pension provisions are ‘bricks and mortar’ which they consider to be a safe place for capital growth of their earnings and something they can sell or rent out to produce cash in retirement. Commonly, these would be residential ‘buy to lets’.
The last bout of changes to pensions legislation offers increased flexibility in regards to how individuals may wish to access their pension benefits in the future. Individuals are no longer required to just view their pension pot as a source of income in retirement, but are also considering it as a way of passing assets on to the next generation in a tax efficient manner.
Personal contributions into pensions continue to offer a variety of excellent tax benefits, however the rules surrounding contributions limits are becoming increasingly complex especially if you have earnings in excess of £150,000. If this applies to you then we would suggest you contact your financial or tax adviser before making any further pension contributions, otherwise you could find yourself facing an unexpected tax charge!
The contributions into a pension scheme are tax advantageous and then the underlying investments held within a pension scheme wrapper can generally grow completely free of tax. When an individual wishes to draw down on their ‘pot’ (crystallisation event) some or all of the value will become liable to Income Tax at your highest marginal rate – this is often a lower rate in retirement than when you were working/earning.
Pensions death benefits have also been amended meaning that it is now far easier to pass pension benefits on to the next generation, without Inheritance Tax implications, and in certain circumstances with complete freedom for the beneficiaries to draw out the funds free of Income Tax.
Owner Managers / Family Businesses
Business owners commonly overlook pensions and often only make nominal contributions into vanilla pension arrangements, rather than considering how pension funds might be able to assist them to meet their business objectives whilst also making provision for their retirement.
We often find that business owners focus their efforts solely towards their business (this is especially true in the early years) rather than combining this with their own personal long term wealth and finance objectives. However, this does not always have to be the case as a number of pension vehicles such as SIPP’s (Self Invested Personal Pensions) allow individuals to dictate (subject to certain rules) the underlying assets to be held within their pension scheme so there is flexibility in the use of their hard earned cash.
Permitted investments include those beloved bricks and mortar - specifically commercial property, such as the company trading premises. On the other hand, the rules exclude anything that a client might potentially be able to draw a tangible benefit from such as residential property (see below ‘Residential’). The upshot of these rules is that business owners could look to use their pensions as means of funding the purchase of a business premises and then lease those premises to their company to generate tax relief on rent payable but no tax on the rental income.
A pension fund can look to borrow up to 50% of its value in order to assist with the purchase of a property at a serious discount as opposed to buying it directly through the business. For some very interesting tax efficiencies on the purchase of commercial property you can refer to our Commercial Property Purchase Plan Calculator
If an individual does not have a sufficient pension pot in order to the fund the purchase on their own then it is possible for families/ business owners to form syndicates with their pension schemes so their cumulative pension ‘pots’ purchase the trading premises.
If the business owner has, for example, earnings in excess of £210,000 then this is a very effective way for them to make contributions in excess of their new reduced annual allowance of £10,000 per annum through a commercial rental payment to their pension.
If you continue to prefer the lure of landlord status as a buy to let owner your pension fund can indirectly invest in residential property. REITS (Real Estate Investment Trusts) are funds which invest in residential property assets. Purchasing interests in REITS exposes your pension fund to some of the upside of owning residential property.
It is not true to say that you cannot own residential property in a pension scheme. The UK rules are set up to ensure that the benefits of doing so make it unpalatable. However, many people who are UK tax resident through circumstance - but who will leave the UK to retire in their home country - could benefit from QROPS (Qualifying Recognised Overseas Pension Scheme).
These are non-UK based pension schemes which can allow for tax relief on the contributions made without the restrictions of an upper limit for the value of the pension pot and which can, in many instances, hold residential property.
These and many other scenarios are available to individuals who would rarely explore their options outside of a portfolio of buy to lets and some nominal pension contributions. The IHT friendly nature of pensions and the flexibility around how you can draw down on those funds at 55 make them particularly attractive in the current tax and investment landscape.
If you would like further help from one of our Price Bailey Property Accountants Price Bailey Property Accountants
or would like to discuss the tax advantages of planning property acquisitions with a pension plan then please get in touch with Richard Grimster: 0800 434 6460 or email@example.com
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