Self Invested Personal Pensions ("SIPPs")
Some Frequently Asked Questions
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Self Invested Personal Pensions ("SIPPs") Some Frequently Asked Questions
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SIPPS - Self Invested Personal Pensions have been available for many years.
In 2005 Gordon Brown, Chancellor of the Exchequer for the last 9 years, and the front runner to be the next Prime Minister after Tony Blair, proved (if proof be needed) that he is not someone who can be trusted.
This is the story. Having announced, in 2004, that from 6th April 2006 SIPPS (Self Invested Personal Pensions) would be able to invest in buy-to-let property with the potential of getting 40% "discount" from the taxman, he remarkably changed his mind - or as some would put it, shafted investors.
In the Pre-Budget Review on 5th December 2005 Gordon Brown made an abrupt about turn and called this scheme - which he introduced - unacceptable tax avoidance and promptly changed the rules. Odd that. He announces it then says that people taking advantage are money launderers - yep nowadays in the wacky world or Labour politics you are a criminal if you take advantage of legislation. Hmm.
In fact it isn't the first time Mr Brown has done something like this and to us the whole idea always sounded a bit too good to be true and was never going to be as simple as many estate agents or insurance companies would have you believe.
Anyway, for your information the following are some of the questions we were being asked by potential investors in 2005. Do read through them and see what might have been possible.
In the meantime do read the following article about the Chancellor's Change of Mind
SIPP stands for Self Invested Personal Pension. They were first introduced in 1989 and currently can, broadly speaking, only invest in quoted securities and commercial property. They are a way of saving for your retirement, which means that generally you cannot have access to the money until then. SIPPs are available to employees who are not in company schemes, to the self-employed and to partnerships.
The assets are usually registered in the names of the trustees who are usually a financial institution and the person contributing. They hold the assets for the benefit of the person contributing who has the main say in what the SIPP invests in. The financial institution is meant to stop the contributor breaking the rules or going off the rails.
You take the investment decisions. If your SIPP includes rented properties the collection of rents and management of the properties may be carried out by you, or the trustees may require estate agents to deal with this. The financial administration will be handled by the financial institution, which acts as trustee.
Q. What important changes are coming in? From 6th April 2006, many of the restrictive rules will be removed allowing you in particular to invest in residential property both in the UK and abroad.
Q. What are the income tax advantages of contributing to a SIPP? Money contributed to a SIPP is (subject to annual limits) net of basic rate tax and, will qualify for a rebate of higher rate tax if applicable. If you are a higher rate taxpayer, this means that the government is contributing an additional 40% to your SIPP fund.
The lifetime limit in the year 2006/07 will be £1.5 million and you can pay in an amount equivalent to 100% of your salary (“the annual limit”) free of income tax as noted above subject to a maximum contributions allowance of £215,000 per year (‘the annual allowance’).
You will have to pay income tax on the difference between your salary and the annual allowance in the usual way, subject to annual exemptions. These limits are to be increased annually (2007/08 - £1.6m). By 2010 it should be an annual allowance of £255,000 and a lifetime limit of £1.8 million. Growth within the SIPP does not count towards the annual limits but will count towards the lifetime limit. If you go over these limits, you face a tax charge in respect of the excess.
Q. What are the tax advantages of holding investments in a SIPP? There is a complete exemption from Capital Gains Tax and income tax within the SIPP subject to the proviso that income tax deducted at source in respect of dividends paid on shares held in the SIPP will not be recoverable. So in effect rental income and capital gain on sale of property attract no tax.
Q. This sounds too good to be true - is it? A drawback is that you cannot get your hands on the money until you are 50 and after 2010 this will be changed to 55 years old. On becoming eligible to draw your pension, through your age (or, in certain circumstances incapacity) the vast majority of SIPP holders will be able to draw a tax-free lump sum of at least 25% of the funds value. The remainder will usually be drawn as income and is subject to income tax. There are strictly defined limits on the way that you can draw income from a scheme. Broadly speaking, you can either use the funds to purchase an annuity to provide income or you can opt to draw funds, subject to various rules as to amounts, slowly from the capital of the fund as income.
Q. Can I get access to the rental income to help pay my living expenses? If you are over 50 (55 after 2010) then the rental income could be paid to you but will attract tax at your highest rate. Under that age then the answer is no.
Q. Can the SIPP buy properties with a mortgage? Yes. The new rules will allow the SIPP to borrow up to 50% of the fund's value. The bad news is that these rules are less favourable than those currently in force for the purchase of commercial property. Experts claim that the post 6th April 2006 borrowing power of SIPPs will be approximately one sixth of that currently in force.
Q. Can I exchange on the purchase of a property by the SIPP and complete after 6th April 2006? There is no clear view as yet on this, though in practice you could exchange contracts in your own name and assign the contract to the SIPP shortly before completion. This is in fact already happening. However, you should always consult with the trustees of your SIPP before committing to any such arrangement.
Q. So I could buy my house in a SIPP and live in it for free? No. There is a restriction on personal benefits received from SIPP assets so if you did this, you would be charged tax on the deemed amount of the benefit you are receiving by living in the house, probably equal to the amount of the rent that the SIPP fund would be receiving if the property were let commercially.
If you own a holiday home within a SIPP you will need to pay a tax charge for the weeks that you or you family use it, if you do not pay rent to the SIPP in practice everybody will pay rent to their SIPP as they are effectively paying money to themselves.
Q. So how do I get my money out? Aside from the entitlement to a capital lump sum as mentioned above, there are 2 ways you can access SIPP funds, drawdown, where you are simply paid money from the capital in the SIPP and through the purchase of an annuity. As mentioned above, you cannot withdraw funds until you are over 50.
Q. Can I sell my existing properties held in my own name into a SIPP? Yes at a fair market price. You will need to consider the capital gains tax implications of doing so if this is not your principal private residence. You should also consider the implications in terms of Stamp Duty Land Tax as this will be payable by the SIPP on the purchase of the property and you will have paid it when you first bought the property. This effectively doubles your Stamp Duty Land Tax liability.
Q. Is it expensive to set up and run a SIPP? It depends. SIPPs can be expensive, but this depends on which SIPP provider you choose and how you run the SIPP. There are set-up charges, annual charges, fund management charges and trading charges all of which can run into thousands of pounds, making small SIPPs impractical.
Q. What if I become seriously ill? If you become seriously ill you may be able to draw all of the money out of your SIPP tax-free.
Q. How will the SIPP be taxed if it buys a property in an offshore location? The income and capital gains tax rules of the host country will apply and would be payable by the pension fund. It is therefore sensible to purchase an overseas property in a tax-free or low tax jurisdiction such as Dubai or some areas of the Caribbean. Otherwise it might be better for the SIPP to invest in shares in a suitable offshore company that in turn owned the property. A word of warning however is that whilst legally most countries in the world should recognize the fact that a SIPP is just a Trust – in reality some, such as Spain, Portugal or France, might block ownership or impose “special taxes” on these companies. This can be got round but at a price.
Q. So I can’t make a killing on properties in Bulgaria and the like? No you can, but the best way is likely to be by investing in specialist property funds which buy and sell the properties – that way you get all the benefits of high capital growth with far reduced risk and costs – also the fund isn’t hampered by only being able to borrow 50% of the fund value.
Q. I need more information, what do I do?
Contact James Green on 0845 331 3141, email him on james@jamesgreenandco.co.uk or write to him at James Green & Co, 12 Windsor Road, Douglas, Isle of Man, IM1 3LB British Isles
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