Too Good to Be True

by Ian Williams FCA TEP, Campbell Dallas Chartered Accountants

Despite being on and then off, it is now back on, such that a Self-Investing Personal Pension (SIPP's) will, from 6 April 2006, ("A" Day) be able to acquire residential property as part of its assets portfolio. The SIPP will also be able to borrow up to 50% from lending institutions to acquire the property.

Is the industry eagerly standing ready and willing to take the money from overly-enthusiastic investors, keen to cash-in on the unstoppable property train. The answer is, maybe, however, a few cautionary words to chew upon before the big day.

First, if you have the idea of purchasing a property that is to become your main residence, be warned that HMRC (The Revenue) will be hot on your tail. Each year you will be required to submit a tax return on which you will be asked a series of difficult and probing questions, such as how much rent did the SIPP tenant (you) pay to your SIPP. If the answer is none or very little, and as it is not a market rent, you will pay income tax on the difference.

Second, the purpose of putting property into a SIPP is the long-term provision of a pension and not for the avoidance of Inheritance Tax (IHT). If you reach age 75 and you are still in occupation, expect an attack from the Revenue on the grounds that they will assume you only put into the SIPP to avoid IHT and, as such, they will want a slice of the action. Clearly, you could sell age 74 1/2 and move into something more modest, having purchased this with independent funds, outside the SIPP, as the SIPP now full of cash from the sale of your "personal" residence must be used to purchase a pension. Moving house at 74 1/2 sounds traumatic to me.

On the subject of a SIPP acquiring property overseas, the jury is out from the UK Revenue's perspective, however, you can bet that tax offices in overseas jurisdictions will not see it as you do, i.e. they will probably see through it and tax it as if it were your own property. Arrangements, therefore, must be fully researched to avoid a long-term nightmare, over what started out as a dream come true.

What is for certain is that there will be a deluge of information and fantastic property offers, too good to be true, about all the wonderful opportunities likely to be at your fingertips from "A" Day.