Investing your SIPPs in Property

One of the main changes the new legislation will encompass is a new set of rules covering eligible investments.

Current pension arrangements have a wide choice of investment options such as commercial property and direct share holdings.

But from A Day, 6 April 2006, allowable assets will also cover residential property (even your own home), works of art, antiques and even fine wines.

Residential Property

Investing in a holiday home the UK or abroad could prove popular, but you need to tread carefully as rules in some countries may make this difficult or even impossible. Make sure you do your research first.

If you intend to rent the property yourself, you will need to prove that you have marketed it as a such first, otherwise the Inland Revenue will expect you to pay tax as a 'benefit in kind'.

Sipps-Pensions.co.uk General Disclaimer

Most wines and classic cars are not subject to Capital Gains Tax so even if you are fortunate enough to be able to realise a profit from such an investment, the tax benefits would be modest. However, you would still incur a personal tax charge on the deemed benefit (usually assessed as 20% of the asset's value).

Since a SIPP will, in most cases, be used to generate an income, then a non-income generating asset should rank well down the list of desirable investments.

Property

One of the most exciting areas of investment within a SIPP is property. It is the only area that allows you to gear your investment by borrowing money to assist with the purchase.

Buying property through a SIPP can be a valuable business-planning tool providing tax savings and can also help with cash flow.

Buy to Let

The buy-to-let market has exploded over the last 10 years with many private landlords experiencing fantastic returns on their investments.

From A Day, it will be possible to hold residential property within a SIPP. This will give Buy-to-Let landlords a tremendous tax advantage as tax relief can be offset on deposits. The rental income is not subject to Income Tax and there will be no Capital Gains Tax on the sale of the property.

Holiday Home

We all dream of owning a second home, be it a bolt-hole in the Cotswolds or a place in the sun. The new legislation means that a SIPP can help make your dreams come true.

Once securely placed in your SIPP, your holiday home is in a tax-free environment allowing you and your dependants to benefit from rental income and capital appreciation without the worry of capital gains tax or income tax.

Commercial Property

Since their launch SIPPs have been used as a tax-efficient way to purchase commercial property and this is still the case under the new rules.

As with the options outlined above, it is possible to get up to 40% tax relief on your deposit, the property is free from Capital Gains Tax and the rental income received is not subject to Income Tax.

However, from 2006 the level of borrowing on SIPPs becomes more restrictive. Before 2006, a pension fund of £100,000 (excluding legal fees) could purchase a commercial property worth £400,000.

But under the new rules, a pension fund of £270,000 (excluding legal fees) would be required to achieve the same level of purchase.

Borrowing for Property Purchase

If you don't have sufficient money in your SIPP fund to purchase a property, you may be able to borrow.

SIPPs currently allow you to borrow 75% of the purchase price of a commercial property. Under the new rules, borrowing will be limited to 50% of the pension fund.

Art, Classic Cars and Wine

From 6 April 2006, a whole range of 'alternative' investments can now be included within a SIPP. However, considerable caution is recommended before following this course.