How to buy a property in Spain via your SIPP pension fund?
Is there a minimum or maximum amount I can invest?
At present the maximum contribution is restricted to an age-related percentage of the member's earnings (subject to a limit on earnings for this purpose of £102,000).
After April 2006 a member will be able to pay up to 100 per cent of his earnings into a SIPP regardless of age (subject to a limit of £215,000).
Alternatively, a company contribution
of up to £215,000 can be paid regardless of the member's earnings. All
contributions qualify for tax relief at basic rate, with higher rate tax
payers being able to reclaim the extra relief through their tax return.
It is also possible to transfer funds from existing pension
arrangements into a SIPP.
There is no minimum level of contribution.
What are the advantages of investing in a SIPP?
Any income arising on the SIPP assets is free of tax, with the exception of dividends on equities, and similarly any capital gains made on the assets are tax free. Allied to the tax relief on contributions, this means a substantially greater fund could be built up within a SIPP than if the member were to take the amount of the contributions as taxed income, and then pay tax again on the investment income and gains.
Will the asset be locked away until I retire or will I be able to access the money?
Currently the earliest age at which a member can access the funds is 50, except in circumstances of ill health. At that time 25 per cent of the fund can be taken as a tax free lump sum, with the balance being used to provide a regular income or pension. This pension is subject to income tax and the amount of the pension which may be withdrawn is determined by factors based on the cost of annuities. The minimum retirement age will increase to 55 from 2010.
When can my SIPP buy property?
From April 2006 a SIPP is permitted to purchase commercial property. This could be let purely on a commercial basis or could be used by the member or his family. For example, a member could buy a holiday property, letting it commercially for most of the year but taking a number of weeks holiday himself in the property. This would be permissible provided the member paid the market rent for the times when he was using the property. The SIPP could also buy a property for the member's children to use whilst at university, provided again that a market rent was paid.
What about property abroad?
SIPP's will also be able to purchase residential property in Spain. Specialist advice will be required to ensure that the tax advantages attaching to the SIPP are not negated by any taxes levied by the country in which the property is located.
I already have a second home - can I put this into my SIPP?
Yes - after April 2006 it will be possible for the SIPP to purchase a property from the SIPP member or his immediate family. The market price must be paid for the property. This will allow the member to free up the cash which was previously tied up in the property but still have use of the property subject to paying a market rent. There may be Capital Gains Tax considerations for the member on the sale of the property to the SIPP.
In effect you can't just put an existing property you own into a SIPP, you have to buy it with money in the SIPP.
How much can my SIPP invest in a property?
The whole of the SIPP funds can be invested in one or more properties. In addition, the SIPP is permitted to borrow funds from a bank or other commercial lender of up to 50 per cent of the amount of the fund. A SIPP with £200,000 of assets could therefore borrow £100,000 and purchase a residential property worth up to £300,000.
What if I want to purchase a larger property than my SIPP can afford even with the borrowing?
It is possible for a group of SIPP holders to pool together their SIPP assets to jointly purchase a property. A legal agreement would be drawn up setting out the proportion of the property owned by each of the individual SIPP's.
What is the difference between a SIPP and a PIF?
A Property Investment Fund (PIF) was a 2004 Budget proposal outlining the Government's ideas for a new form of property vehicle. It is intended to allow small private investors access to investment in the property market by purchasing units along with other investors in a shared fund. It is unlikely to share all the tax advantages of SIPP.
Would you advise a client to invest in a SIPP or stick to a more conventional pension?
Many investors have become disgruntled with insurance company pensions due to the poor returns on their investment funds. A SIPP puts the control of the investments in the member's own hands - he can use the SIPP to invest in equities or choose from literally hundreds of professionally managed funds. In our experience though it is property that is the key attraction for many SIPP holders and with the advent of residential property we expect the demand for sipp's to increase sharply in the run up to April 2006.
Please note that the information herein is of a general nature and you should not act or refrain from acting on it without professional advice on the specific facts of your case. Taxation is a complex subject and the below is a basic outline only intended only as a general guide. Nothing herein constitutes financial advice.
How do I set one up?
You would need an amount of money, which you could transfer from an existing personal pension, to start with if you want to buy property.