Rental properties as your pension fund?

Innys

Hi

I read a while ago that from April 2006 any properties owned for rental purposes could be transferred into a pension (personal only I presume, rather than company as well) to shield the rental and capital gain from tax.

However, when I went to my local tax office to discuss this further, they looked at me as if I was mad... :mad:

Does anyone know the true position or can you refer me to guidance from the Revenue?

Thanks

I

savvy

Just bumping you over to page 1 in hope of an answer to your query.

savvy

isasmurf

The Inland Revenue is still drawing up guidance on all aspects of Pensions Tax Simplification. Their original consultations documents did mention this, and it has been widely reported, but I can't find any detailed guidance on the ins and outs of this.

I suspect that you won't be able to simply transfer any property you currently hold into the Pension scheme. You would probably have to sell it and rebuy it back in the Pension Scheme, similar to what you have to do with shares you own that you want to put into an ISA. However, you would only be able to buy it with the funds in your pension scheme. So that would be what is already there plus that years contributions, and remember from 2006 you are limited to 100% of earnings as the amount you can contribute to a Pension scheme in any one year.

It will apply to both personal and company pension schemes, subject to that pension schemes rules. The aim of Pensions simplification is to create one rule for all pension schemes.

Finally, you may get better answers if this was on the pensions board. Perhaps the board guide could copy/move it across there?

BFG_2

This is a complcated area and the general feeling seems to be that you will still be better off actually owning the properties in your own name.

Will see if I cAN DIg out further details

Innys

Thanks for the replies guys.

Incidentally, an article in this week's Times quotes some guy from Hargreaves Lansdown who says:

"From April next year, you will be able to invest in as many pension schemes as you like and can use any spare cash to fund a separate private pension."

So maybe you can have your cake and eat it - a personal AND company pension.

With regard to the point about a personal pension schme buying existing properties, that's going to supper most people unless they already have personal pensions with massive balances on them - i.e. the obscenely rich (Richard Branson and others). Let's face it, most pensions, even at maturity, have an asset value far less than the cost of the average home. So if this is intended to encourage people to save for their retirement, it's doomed to fail.

isasmurf

Innys wrote:

Incidentally, an article in this week's Times quotes some guy from Hargreaves Lansdown who says:

"From April next year, you will be able to invest in as many pension schemes as you like and can use any spare cash to fund a separate private pension."

So maybe you can have your cake and eat it - a personal AND company pension.

Yes, most of the current rules are being done away with. You will be able to invest in any number of pensions of different types (i.e. occupational and personal and stakeholder, etc.) providing the total across all those pension schemes doesn't go over your annual and lifetime allowances.

BFG_2

The financial press have also recently run stories on this topic, with emphasis on the new tax regime that implements Gordon Brown’s "Simplification of the Taxation of Pensions" from April 2006.

Much of the press comment deals only with the apparent benefits and there is suspicion that some of it is promoted by the Pensions Industry and IFAs, keen to drum up business and generate fees and commissions. The very real downsides are glossed over or even ignored altogether.

For example, there is much excitement because it will be possible to put residential, rental property into a SIPP and not only will the rental income and capital gain roll up tax-free but, also, the cost of the property may be deductible for income tax, saving up to 40%.

Sounds good. But what is not mentioned is that, once the property is in the SIPP, it could cost up to 70% of its market value in tax charges to get it out again, if you need the cash or want to have something to leave in your will.

Better, surely, to own the rental property yourself. The rents will be subject to income tax at up to 40% but the maximum capital gains tax is likely to be only 24% after ten years ownership (and only 10% for business properties after two years) and it is tax on the gain not the full proceeds, as is the case with the 70% Pension Tax charge.

There is no capital gains tax at all if ownership is retained until death, although Inheritance Tax may then kick in, but that is still only 40%, with a current allowance of £263,000.

A conspiracy theory
The conventional wisdom is that the fiendishly complex 136 sections and 9 schedules of Finance Act 2004 that implement the "Simplification of the Taxation of Pensions" are a good deal.

But who will really benefit? The Inland Revenue and the Pensions Industry (strange bedfellows, to say the least) say pension savers will. Well they would, wouldn't they?

The Pensions Industry actually backed the Inland Revenue’s proposals with surprising unanimity and enthusiasm. You do not have to be a complete cynic to suspect their motivation was simply to encourage savers to continue to buy pensions despite the very serious drawbacks of the new regime.

But what motivated the Inland Revenue and the Treasury? What is not always seen is that it is not only savers who hope to get more out of pension funds than they put in. The Treasury also craftily calculates that it will rake in more tax on pensions paid out than it will have to give in tax relief on contributions paid in. Much more!

The underlying principle "tax relief on contributions paid in" justifies taxation of pensions paid out’ is reasonable enough. But the Inland Revenue were not content to stop there. They had to add:


40% tax charge on contributions over of the annual allowance (£215,000 for 2006/07);

55% tax charge on benefits drawn in excess of the lifetime allowance (£1.5m for 2006/07);

55% or 70% tax charge on unauthorised payments. These rates include the "Scheme Sanction Charge" and the "Unauthorised Payments Surcharge" and can apply to such simple transactions as just getting your original savings back.
How can the penal 55% and 70% rates be justified? Equity is surely fully satisfied if pension fund payments and contributions are symmetrically taxed and relieved at the same rate.

Pension tax charges should therefore be no more than 40%. Rates in excess of that mean not only asymmetry but also that pension fund assets actually suffer more than the maximum tax on the same assets held personally. Only avarice of the Inland Revenue and the Treasury can explain that.

Alternatives
Why would anyone want to expose their hard-earned savings to minimum 40% and maximum 70% tax by putting them into the straitjacket of a Personal Pension or SIPP? It is not as though there are no alternatives with considerably more flexibility and considerably lower tax exposures.

PEPs and ISAs for a start. In converse to pensions, the principle here is "no tax relief on contributions in, therefore no tax on payments out", no matter how much profit or gain you make or how much you pay out to yourself.

Second, direct investment in Unit and Investment Trusts. It is often overlooked that investments inside these entities roll up tax-free, the same as in pension funds. You can cash in easily whenever you want and tax is only 24% after ten years ownership and it is tax on the gain, not the full proceeds as it is with pension fund taxes.

There is no capital gains tax at all on death, so there will be something to leave to the children (subject to IHT) if you don’t spend it all yourself before you go.

Third, there is the already popular alternative of direct ownership of residential or business, rental property. The maximum capital gains tax charge is again likely to be only 24% or 10% on lifetime disposals and 0% on death (subject to IHT). And you have the security of owning the property 100% yourself as well as getting the rents.

What a racket
The truth is, Personal Pensions and SIPPs are rackets perpetrated by an unlikely and unseemly alliance between the Pensions Industry and the Inland Revenue. They are really nothing more than commission and fee generating machines for the Industry and tax generating machines for the Revenue. You are likely to be much better off owning your savings personally and looking after them yourself.

BFG_2

No one will look after your money better than yourself!

Buying houses (1987) - lots of people lost money (remember negative equity)

Dot com's - lots of people lost money (remember Last Minute.com fever?)

Taking your pension out of the company scheme - lots of people lost money

Shares - lots of people lost money

Endowments - lots of people lost money

Precipice Bonds - lots of people lost money

Who made the most money in all of these areas - the estate agents, stockbrokers and pensions salespeople

BFG_2

..forgot to say that the very long posting above is not my work, it's something I saw a while ago and copied to my e-files, but forgot to note who wrote it so can't credit it to the original author correctly.

Apologies (to whomever it is).