Beware the Sipps stampede


A BUY-TO-LET and holiday home stampede is being forecast as changes to pension rules next April bring in tax concessions for residential property. For the first time it will be possible to own a home as part of a personal pension.

Buyers will get tax relief at their highest rate – so a 40% taxpayer would effectively pay £60,000 for a £100,000 property, and rental income from buy-to-let could be saved within the pension free of tax.

It sounds very tempting, but is the hype justified?

To take advantage of the change, you would need to set up a self-invested personal pension (Sipp), for which you would need the help of a professional.

So far so good. You have a bricks and mortar asset within your pension portfolio that is not at the whim of jittery global stockmarkets and which is providing you with a steady income.

But as ever, there is devil in the detail and you should proceed with caution.

Andy Bell of Sipp provider AJ Bell says. 'There are significant question marks with regard to overseas residential property in a Sipp. Firstly there may be legal issues, Sipps are set up as trusts and many EU countries do not recognise trusts. So a property in Spain for example, would have to be bought by a nominee company set up for that purpose.

'Also you have to look at the tax implications. If you include a property in the UK within your Sipp, say a holiday home in Dorset or the Lake District, because it is in a pension fund, there is no tax on rental income or any capital gains tax liability. However there is rental income tax and capital gains tax on overseas property. There will be cases, such as Dubai, where there is no tax on property but then you are getting into major overseas investment.'

Also when buying abroad, beware of additional costs, particularly legal bills. Surveyors and property managers are often more expensive for overseas property.

If you want to avoid the aggravation of investing in overseas property, the option to invest in the UK is more straightforward. The tax benefits are clearer and inspecting any prospective purchase is easier.

However there are still pitfalls that must be avoided. Firstly, the residential market is just about holding up, but inevitably the pendulum will swing and a downturn in capital values could result.

Tom McPhail, pensions research manager at Hargreaves Lansdown, says: 'The main question is whether the property market is just going to plateau or actually fall in value. Either way, if the capital gains aren't there and the rental income is reduced, then property as a new investment proposition doesn't look quite so exciting.'

But why would rental incomes be any more reduced within a Sipp?

McPhail explains: 'Most buy-to-let investors, manage their property themselves. With a Sipp this won't work.' This is because the Sipp trustees will be legally responsible for the maintenance of the property.

'The Sipp provider is likely to want to contract this work out to a management company. This is going to make a dent in the profitability of residential property investments,' says McPhail.

The onus is on the Sipp investor to do their sums. If, for example, we assume rental yields are around 5%-6%, by the time you have allowed for an average period of 30 days a year when the property is unoccupied, and knocked off 15% for the cost of property management, the investor is looking at an income to the fund of around 4%. If there are any significant maintenance costs on top, then that profit is going to be eaten up very quickly.

Beware the Sipps stampede

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