New SIPP rules

Innys

Please can someone clarify my understanding of the new SIPP rules with regard to rented property. the questions I have are as follows;

1) Does a SIPP need to buy a property using its own accumlated funds for it from the 06/07 tax year?
2) Is it possible to transfer a an existed rented property into a SIPP with no payment being made?
3) Can a SIPP be run alongside a company pension from the 06/07 tax year?
4) Assuming a SIPP contains rented property, I understand the trustees would need to be consulted for change to it e.g. refurbishments, changes of tenants, changes in term of a tenancy etc. But who are the trustees?

I believed the SIPP had to buy any property to be held within it and so had to have the funds available to fund the purchase.

However, my friend's financial adviser has stated he can buy a house, live in it for a while, move out, start renting it and transfer it into a SIPP without the SIPP paying anything for it. Quite apart from anything else, this would be a massive contribution to the owner's pension fund within one tax year, which, surely, is not permitted?

Thansk for any feedback you can give me

dunstonh

1) Does a SIPP need to buy a property using its own accumlated funds for it from the 06/07 tax year?

No. It can be the total pension fund regardless of when you contributed into it.

2) Is it possible to transfer a an existed rented property into a SIPP with no payment being made?

Yes and no. You can't transfer it. You need to sell the property to the pension trustees. You will no longer be the owner of the property. The pension trustees will be. Stamp duty and solicitors costs would apply.

3) Can a SIPP be run alongside a company pension from the 06/07 tax year?

Yes, as they can now. The rule where you cant have a personal pension if you are in a final salary pension and earn more than 30k appears to be going.

4) Assuming a SIPP contains rented property, I understand the trustees would need to be consulted for change to it e.g. refurbishments, changes of tenants, changes in term of a tenancy etc. But who are the trustees?

The pension trustees from the SIPP provider. Don't expect it to be cheap when dealing with pension trustees. Remember, they own the property, not you.

At this stage, there are still many unknowns. It's quite possible that you will not even be allowed to hold keys to the property. Plus as the trustees are the one's liable for the property, expect them to insist on what insurance is held and it will be at their price. They may insist on higher limits and more insurance than you would do yourself. Any work on the property would use their chosen builders/decorators/engineers etc and likely to be more expensive than the local guy you would get. They would almost certainly insist on regular inspections which, again, you would need to pay for.

I believed the SIPP had to buy any property to be held within it and so had to have the funds available to fund the purchase.

Yes, although you can borrow as well to certain limits.

However, my friend's financial adviser has stated he can buy a house, live in it for a while, move out, start renting it and transfer it into a SIPP without the SIPP paying anything for it. Quite apart from anything else, this would be a massive contribution to the owner's pension fund within one tax year, which, surely, is not permitted?

Although final rules are going to appear in January, its 99% positive that you will have to "sell" the property into the SIPP at the market value. There is no way the inland revenue would allow it to be done on a nil value basis because it would become an IHT loophole.

EdInvestor

Details here:

https://www.lifetimelimit.co.uk

Property cannot just be transferred to a SIPP. You have to sell the property and the SIPP has to buy it.THe SIPP can borrow up to 50% of its value, thus to buy a property worth 150k, the SIPP will need to have 100k cash in it.

You can transfer money into a SIPP up to your annual salary (or 215k whichever is the largest and this will be grossed up. You will have to pay capital gains tax if you sell a rental property to your SIPP.

isasmurf

EdInvestor wrote:

You can transfer money into a SIPP up to your annual salary (or 215k whichever is the largest and this will be grossed up.

No, it's up to your annual salary or £215k after grossing isn't it?

Edit: And it's whichever is the smallest.

whiteflag_3

Property cannot just be transferred to a SIPP. You have to sell the property and the SIPP has to buy it.

Ed, this is incorrect- You will be allowed to make an "in specie contribution " using an existing property and get full tax relief.

EdInvestor

Oops! Isasmurf is right.

Tell me more about this in specie transfer, whiteflag, I've heard rumours about this. Will you be able to avoid CGT, stamp duty, estate agents',solicitors' and surveyors' fees?

dunstonh

The in-specie transfer is the process used to do it but it is still treated as a disposal and purchase and all taxes applying to that would apply.

The legal method is, at this time, unknown but I wouldnt be surprised if it mirrors SSAS to SIPP property transfers which would be similar.

I would guess that a survey of some sort would be required to ascertain the correct value. Probably just a basic valuatation done by an industry qualified individual and put in writing. Otherwise you could abuse the contribution limits. However, this sort of question is most likely best answered after January.

whiteflag_3

I've heard rumours about this. Will you be able to avoid CGT,

I would think if a second property there would be potentially a CGT charge
and most likely always stamp duty.

There would also need to be a survey for valuation purposes and solicitors fees for transfer of title.

Seems costly however this is how it could work-

Transfer property to Sipp worth £78K
Tax relief a basic rate grosses up to £100
Higher rate tax payer reclaims further £18k

£100K in pension (property +cash) Net cost to the investor £60k!

EdInvestor

Thanks for the info, I did think it was most unlikely that our Gordon would forego his just and rightful dues from all those rich higher rate landlord taxpayers......;)

dunstonh

Here is an indication of the likely charges on a SIPP. Now there will be some variations to these across the board but its handy to know what sort of costs we will be looking at:

Property Transaction Charges

n£30 per transaction, subject to a maximum of £300 a year
n£550 per transaction plus 0.1% of value in excess of £400,000 (a fee will be charged for aborted transactions according to time spent)
n£500 annual property administration charge for each separate letting by the trustee (excluding sub-lettings)
n£100 annual mortgage administration charge
n£120 VAT Registration fee (where property subject to VAT)

Property Management Charges

Properties are managed by xxxxxxxxxxxx Property Management. Charges are subject to VAT.

nRent review - £250 per property
nTriennial valuation - £200 per property
nAdditional work - £60 per hour


Solicitors Charges


solicitors charges are subject to VAT.

n£1,250 & disbursements per transaction on property up to £400,000. Solicitors will provide a quote for fees on transactions over £400,000.
n£300 where a lease is required to tenant connected to the Member
n£950 where a lease is required to a third party tenant
n£300 where a loan is required and retained solicitors are acting
n£600 where a loan is required and the lender appoints their own solicitors
nFees for transactions with exceptional features will be subject to further agreement.

EdInvestor

Anyone thinking of starting a SIPP with the above level of charges would be well advised also to check the SIPP's transfer-out charge in case he decides to move to a cheaper provider later.