The following is a quote from the Times about the 2006 pension changes:-
"So a 100,000 property bought within a Sipp would, after relief at 40 per cent, cost a higher-rate taxpayer just 60,000. Rental income will accumulate tax-free and there is no capital gains tax on profits when the property is sold."
Can anyone please explain to me how the 40,000 relief can be recovered from the IR.
I assume the pension fund will have to pay 100,000 for the property.
Thanks
If you make a payment of 78,000 into the SIPP the Revenue will return
22,000 as tax relief. The other 18,000 will come off your tax bill, assuming the whole of it doesn't take you below the higher rate tax band.
Yes. But you can borrow half the fund and raise a mortgage for the rest (after 6th April 2006). The mortgage costs are borne by the SIPP funds.
Rob Graham
But you can never liquidate that gain.
It must stay in the fund and you pay Income Tax on the resultant income that it provides.
Whilst the possibility of investing your pension in property is great if that's what you want to do with your pension funds, this isn't the free lunch that the paper implies that it is
tim
So you'd need to earn over 135,000 pa for this to work?
Ok, then you'd need to earn over 85,000 pa for this to work. Or can you spread the purchase cost over several tax years?
Yes, there's no free bung here - it's your own money being reclaimed, and then only insofar as it has already been preemptively taken from you by the tax man.
(Financial journalists often seem to portray it as being free money, which, if it were true, would certainly make the question 'how can the
40k relief be recovered?' seem less tautological.)
Yes
Depends what you mean. The SIPP has got to have enough money in it to pay the vendor of the property what he needs (via a mortgage for no more than half the SIPP fund value, if necessary). If it hasn't then the money would have to stay in the fund, as say cash or shares or something, and be topped up by a pension contribution the next year if you wanted to ensure tax relief @ 40%.
To expand on this, one might suggest that many people already have pension schemes which they could encash directly into the SIPP, thereby releasing cash to use for property purchase, but this is going further than the original question.
Rob
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