In his Pre-Budget Statement the Chancellor
announced a complete U-turn on investment
by pension schemes after 6th April 2006. He
announced that in the interests of encouraging
pension savings through diverse investments
investment in residential property by SIPPs
is no longer to be permitted. It
is speculated that the reason for the decision
is to protect the Treasury from reduced income
and capital gains tax revenue but it may have
been necessary to take this step because of
the difficulties of drafting suitable anti-inheritance
tax avoidance legislation to prevent those
who were planning to pass on family assets
to their children through their pension funds.
The Technical Briefing issued by HM Revenue
& Customs makes it clear that if a SIPP
makes an investment in residential property
then an income tax charge of 40%
will be levied on the value of the
prohibited asset. In addition, the
scheme administrator will suffer a scheme
sanction charge of 15% and in the
event that the asset exceeds certain limits
there could be a further 15% charge
on the member, i.e. potentially a
total tax charge on the fund of 70% of the
value of the property. Where the value of
the property exceeds 25% of the value of the
scheme assets, then the scheme
may be de-registered which would
lead to a tax charge on the
scheme administrator on the value of the total
assets of the scheme at the rate of
40%.
The note makes it clear, however, that where
an investment includes an element of residential
property, then this will not
be prohibited. Further clarification on this
issue is awaited. In the meantime it is expected
that sections of the industry will lobby Parliament
for amendment of the decision but a recent
survey by Money Marketing (a weekly publication
for professional financial advisers) revealed
that 60% of IFAs polled were not in favour
of residential property as an investment.
Unless there are any further changes of direction,
it appears that residential property might
be possible in the following circumstances:
-
Where it is incidental
to a commercial property investment, e.g.
a flat above a retail shop or a caretaker’s
flat in an industrial unit.
-
Where it is part of a
portfolio of property investments offered
through a collective investment vehicle
such as the recently announced Real Estate
Investment Trusts (REITs).
-
Where the member has
no personal benefit from the property, i.e.
does not occupy the property.
Clients who were planning investment in residential
property will need to consider alternatives.
If you would like further information please
contact Barnes Hunter on
0117 930 0061.
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