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The rules on holding property in pension funds were changed in April, and
many partners will wish to reconsider their previous policy on holding
properties within pension funds. In essence, the new regime makes this a
better option than was previously the case.
The key point, of course, is that
contributions to pension funds (which can then be used to pay the deposit
for a property or to cover repayments attract tax relief at the highest marginal
rate – often 40%. The pension fund will pay no IT or CGT on any increase in
value, and the rents received are not subject to tax (even though the
partnership will receive tax deductions on rents paid). Finally, when benefits
are drawn on retirement, a quarter of the fund will be available as a tax-free
lump sum.
The main effect of the April changes is to simplify the previous regime. In
particular, connections between pension funds and ‘connected persons’ are
now possible. Thus, a pension fund can buy property direct from a practice
or from a partner (or vice versa). The second major change concerns
borrowing limits, and, whereas it was previously possible to borrow up to
75% of the purchase price, the maximum borrowing has been reduced to
50% of scheme assets (eg with a pension fund of £100,000 it would now
only be possible to borrow £50,000 to fund a purchase of a £400,000
property – whereas previously it would have been possible to borrow up to
£300,000). The final point to note is that it is no longer necessary to buy an
annuity at the age of 75 (in the past it was necessary to sell any property
held by the age of 70 to produce the necessary liquidity to buy an annuity
by 75).
An excellent article in the Gazette shows how this can work. Suppose a
partner has an existing fund of £200,000 and wants to buy a property worth
£400,000. A contribution of £66,667 gross is made (£40,000 net of 40%
tax relief) bringing the total fund to £266,667. A loan of 50% of fund value
– £133,333 – is allowable, which produces the necessary £400,000. Rents
of £20,000pa, based on an assumed 5% yield (to be paid by the firm), would
enable the mortgage to be paid off in about eight years. Thereafter, rents would boost the overall fund value and could fund retirement income. Any
property inflation will be free of CGT. For more on this see article in [2006]
LSG 15 June 31.
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