Residential property
in pensions? – Perhaps not!
We all remember the headlines’
make residential property part of your pension portfolio’
from 6th April 2006; this was Gordon Brown’s way of
encouraging people to consider pensions as an alternative
investment vehicle.
What a difference a few
months makes, as Gordon Brown The Chancellor of the Exchequer
has announced that he will remove the tax advantages for investing
in residential properties in a registered pension scheme from
6th April 2006.
His explanation is that
this is to prevent people from benefiting from tax relief
in relation to contributions made into the personal pension
for the purpose of funding purchases of holiday or second
homes for their or their family’s personal use.
Legislation will apply
for all registered pension arrangements where the pension
scheme member can direct which investments the scheme makes.
This will include those currently categorised as Self Invested
Personal Pension Plans (SIPPS) and Small Self Administered
Schemes (SSAS) as well as a number of other schemes.
The legislation will apply
to direct and indirect investment in residential property
which means that it is impossible for a personal pension scheme
to own a company in a SIPP or a SASS that has any residential
property on its balance sheet as an investment.
The legislation will be
designed to remove all tax advantages from holding property
assets directly or indirectly in pension schemes and will
broadly mean that it is at least no more advantageous to hold
such assets in a pension scheme than it is to hold them personally.
If a pension scheme directly
or indirectly purchases a prohibited asset such as residential
property the purchase will be subject to the unauthorised
member payment charge. This will recoup all tax relief given
on the amounts used to purchase the asset.
This means that:
- The scheme administrator will become
liable to the scheme sanction charge, which will usually
be a net amount of 15% of the value of the prohibited
asset.
- If the set limits are exceeded the
cost of the asset may also be subject to the unauthorised
payments surcharge, which is a further charge on the scheme
member of 15% of the value of the asset.
- If the value of the prohibited asset
exceeds 25% of the value of the pension scheme’s
asset. The scheme may be de-registered, which would lead
to a tax charge on the scheme administrator on the value
of the scheme assets at a rate of 40%.
Therefore for example if
a pension scheme purchased a pointed asset costing £100,000
there would be a total tax charge of £70,000 on the
scheme and its member and the scheme could risk be de-registered.
If the scheme were de-registered there would be a further
40% tax charge on the value of the assets held in the scheme
at the time of re-regulation.
For further details please
refer to www.kpmfinancial.co.uk for updated documents relating
to A Day.
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