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SIPPs and Property
SIPPs and Property
The recent demise of numerous pension funds, managed by private pension companies and banks, in the wake of the sub-prime crisis and financial scandals such as the Madoff scandal has led many investors to question where they place their pension funds. The idea of managing your own pension fund is certainly attractive. The Self-Investment Personal Pension (SIPPs) fund is one such option.
SIPPs offer numerous advantages, some of which they share with traditional pensions such as taxation. All contributions attract tax relief from 23% to 40% (the exact amount depending on your earnings). On retirement, SIPPs holders may withdraw a tax-free lump sum of 25% of their fund.
However, although tax benefits may be similar to normal pension funds, SIPPs are considerably more flexible than pension schemes and fund holders can invest in a variety of different asset classes instead of being limited to a number of managed funds. When SIPPs were first introduced in the UK, the government originally planned to allow residential property to form part of a SIPP fund. However, once the tax implications became clear, the government did a U-turn and prohibited this.
On the other hand, commercial property is allowed to form part of a SIPP fund. Commercial property may consist of retail premises, offices or hotels and the advantages of ownership through a SIPP are numerous. For example, a SIPP holder can use funds from a SIPP to buy the property outright or to put down a deposit (e.g. 25%) and pay the balance with a commercial mortgage.
Tax benefits are also numerous. Increases in the property’s value are free of income tax and capital gains tax, and rental income is also tax free as long as the income is collected in the pension fund.
As well as owning commercial property within a SIPP fund, holders are also allowed to enter commercial agreements with other investors. This type of shared ownership means you cannot use the property yourself or receive benefits in kind – for example, if the property is a hotel you would not be able to take advantage of discounted room rates – but you still benefit from any profits made from the investment.
“At a time when conventional pension funds are achieving huge losses, it is well worth investigating the benefits of commercial property in a SIPP fund,” says Ken Thorkildsen, Director of Obelisk Private Finance. “However, investors must carry out due diligence and ensure the property has a solid exit strategy such as good rental income (e.g. room rates from a hotel) or guaranteed return on investment.”
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