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Tax Incentives To Invest In Pension Properties – Part 1 – Pension Overview

July 8, 2014

Posted by Simon Misiewicz on 8th July 2014

Would you like to invest in property whilst getting a tax rebate?

Would you like to build and control your pension pot?

In this series of articles I am going to demonstrate the tax advantages of investing into a pension fund that still allows you to invest in property. Albeit the properties you will be allowed to invest into, will be commercial in nature.

The types of commercial properties that will be allowed are as follows:

  • Offices
  • Shops
  • Restaurants
  • Warehouses / factories

There are several elements to this series as follows:

Part 1 – Pension Overview & SIPPs

Part 2 – SSAS pensions and loan backs

Part 3 – Business & employer contributions

Part 1 – Pension overview & SIPPs 

The Diagnosis

Tax issues need to be diagnosed in order to be understood for a remedy to be implemented.

We all pay taxes,  wouldn’t it be nice for once to get a tax rebate on the investments that we make? Well sure enough there is such a strategy. It is called pensions. I am sure that you have heard all about pensions but how about this, you invest in property and the amount you invest,  you get 20% to 40% tax back?

The state pensions will not provide for us in the long term. We therefore need to invest in properties or businesses so that we can be self-sufficient. At the time of writing it is shown that the state pension scheme is only paying out £113.10. For me that is not enough to have the lifestyle that we deserve. (2)

I am not a very trusting person when it comes to strangers, which is why I have not invested into pensions where someone who I do not know, handles my financial affairs and bets on stocks or cash investments.

The film Wolf Of Wall Street identified one thing. People that gamble had a lot to gain if they make the right investment on your behalf but they have very little risk themselves. We, the people that put money into the investment, carry all of the risk.

The Treatment

Applying the right tax reducing medicine to your tax illness.

OK I have gone on long enough about how we must be in control of our own destinies, something that the great gurus of Anthony Robbins, Jim Rohn, Stephen Covey, Darren Hardy, Jim Olsen to name but a few would suggest. That is why pensions, which you control, provides a pro-active way to manage your investments.

There are different types of pensions that you need to be made aware of. There are four different types of pension arrangements (1):

  • Money Purchase
  • Defined Benefits
  • Cash Balance
  • Hybrid

As we are talking about pensions for property investors then I am only going to concern myself with the “Money Purchase” aspect of pensions.  The following types of pension schemes are normally money purchase arrangements:

  • Personal Pensions (PP)
  • Stakeholder Pensions (SHP)
  • Retirement Annuity Contracts (RAC)
  • Small Self Administered Schemes (SSAS)
  • Free Standing Additional Voluntary Contribution Schemes (FSAVC)
  • Self Invested Personal Pensions (SIPP)

What is a Self Invested Personal Pensions (SIPP?)

A SIPP is a type of personal pension scheme. The SIPP itself is a pension ‘wrapper’ that holds investments until retirement and the investor starts to draw a pension income.

Most SIPPs allow investment in a range of assets including commercial property, not just in an insurance backed fund provided by an insurer. SIPPs are designed for people who want to manage their own fund by dealing with and switching, their investments when they choose. They may have higher charges than other personal or stakeholder pensions. As with any pension fund, the investor cannot take money from the fund until the age of 55.

A SIPP can invest directly into other businesses, however, you can’t use it to invest in the business you own.  All income or gains generated will be entirely tax-free.

SIPP Example:

You have a limited company and you wish it to buy a new office unit for £50,000, and the market rent on this is £5,000 per annum. You have a pension amounting to £10,000 but wish to contribute another £20,000 pension contribution.

£50,000 property value

(£30,000) pension pot

£20,000 shortfall delivered though a 5% bank loan

The £30,000 pension contribution attracts a tax relief of 20%. Therefore you are only investing £24,000 of your own money. £6,000 is a contribution made by the taxman. Nice.

The £5,000 rental income is also tax-free. The ROI is calculated as follows:

£5,000 rental income

£1,000 mortgage interest

£4,000 tax free

ROI is therefore 16.7% (£4,000 net profit divided by the amount invested £24,000 X 100).

But wait. There is an additional bonus. The fact that the rent paid to the property is a taxable expense then there is a tax saving for company of £1,000 (£5,000 X 20%)

ROI is therefore 21% (£5,000 net profit divided by the amount invested £24,000 X 100).

The value of the pension fund can be passed on, without attracting Inheritance Tax. Even when the property is sold; the capital gain is tax free. This is a 20% tax saving compared to a limited company buying the property. It is also a 28% CGT saving if you are a high rate tax payer.

Investing in a pension fund is therefore a very attractive proposition. This only works if you do not need the money from the property before retirement age.

SIPPs and CGT mitigation

If you have an asset and sell it for a profit of £50,000 then you are likely to have a CGT bill of 28% being £14,000. However if you invest this money into a pension then you will have a tax break of the amount invested up to £50,000 in any one year. Given this £50,000 will attract a tax saving of 40% or £20,000. The tax saved through the SIPP contribution more than makes up for the CGT bill.

If you are looking for an accountant or thinking of changing your current accountant because they do not understand property investing then please book an “Initial Free Consultation” on the below website: www.optimiseaccountants.co.uk/events-appointments/

Please ensure that you check out our latest webinars and courses http://www.optimiseaccountants.co.uk/events-appointments/

References:

  1. http://www.hmrc.gov.uk/pensionschemes/types-of-scheme.htm
  2. https://www.gov.uk/workplace-pensions
  3. http://www.hmrc.gov.uk/pensioners/pension-company.htm
  4. http://www.hmrc.gov.uk/pensionschemes/small-pen.htm
  5. http://www.hmrc.gov.uk/pensionschemes/understanding-aa.htm
  6. http://www.hmrc.gov.uk/incometax/relief-pension.htm
  7. http://www.hmrc.gov.uk/pensionschemes/understanding.htm
  8. http://www.hmrc.gov.uk/manuals/vatfinmanual/vatfin5700.htm

 

 

 

 

 



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Telephone: 0115 939 4606
Email: simon@optimiseaccountants.co.uk