SIPPs & HMRC

I don't have any answers for you, Nick, but I sure hope a 'SIPP expert' can answer your query.

For what it's worth, my understanding of it is completely different - the Inland Revenue refunds 40% of your contributions to the fund, which in this case is £0.00. The property purchase is a transaction that has taken place entirely within the SIPP 'trust', and therefore no refund of contributions will occur (similarly, if the property generates rent it is tax-free in the SIPP but does not count as a contribution to the fund).

I'm more than happy to be corrected by someone more knowledgable in these matters!!!

Shano

Yes, of course... I must have taken a stupid pill this morning !

The tax rebate will only be on (_can_ only be on !) "new" money into the pension fund.

I think I've understood also that rental income and capital growth will neither be taxed nor deemed as "contributions".

1. On April 6th 2006, a SIPP has a total fund value of 75,000

**OK

1. The person it relates to has an annual income of 85,000

**OK

1. The SIPP borrows 25,000 and buys a property for 90,000

**In order to do this the SIPP owner has to provide the SIPP with the cash to add to the loan to buy the property. He's not buying it for himself. He does this by making a contribution (a pension premium, if you like). So he needs to put in 90,000 - 25,000 = 65,000. If grossed up by 22% this comes to 83,333, which is within his annual allowance of 85,000, so it's OK.

1. The value of the fund is now 10,000 in cash and it has an asset worth 90,000, so 100,000 total

**But also a debt of 25,000, although that's not particularly relevant to the questions you're asking. Plus, see para 5 below.

1. The Inland Revenue writes the fund a cheque for 36,000 (40% of the property purchase price)

**No. The IR writes a cheque for a figure which grosses the 65,000 up by 22% to 83,333, i.e. 18,333. This is because pensions get tax relief on the contributions, not on the purchase price of any property they may buy. And this tax relief is obtained by making a contribution net of basic rate tax and the tax is put back by the Revenue. This applies to all personal pensions, not just SIPPs. In fact, it would not be impossible for the owner to make a contribution a bit less than 65,000 because he knows that the IR will be paying some in a bit later. But the property vendor may not want to wait for his money.

1. On April 5th 2007, the fund value is 46,000 in cash (ignoring investment returns) + an asset worth 90,000, so 136,000 total

**No, it's 28,333 + an asset worth 90,000, less 25,000 debt = 93,333

For contribution limit purposes, I assume the Revenue contribution counts, but what about the loan amount ? Would the total deemed contributions be 36,000 or (25,000 + 36,000 = 61,000) ?

**No, the total deemed contributions would be 83,333 (65,000 + 18,333 return of tax). He would get a further 18% tax relief via his self assessment but this would not go into his fund like the 22% did. In case Ronald R is reading this(!!) - he'll actually get a bit less than 18% because not all his salary is taxed at this full tax rate.

Rob Graham

I presumed that the SIPP cashed in its previous investments and put them all into the house. The SIPP holder needs to make no further contribution to have, as he says, a 100K in the fund.

agreed.

If the SIPP simply uses money already in the fund to buy the house surely Tax refund will be Nil because the money in the fund has already received Tax relief in the year that the contributions were made. You can't get Tax relief on the borrowed money because if you sold the house tomorrow it will need to be paid back.

No, it has 10K and an asset work 90K (plus 'investment' increases) just like it did before.

There is no IR contribution in this case.

Sorry Rob, I don't think that this is right.

Tim

Oops, didn't read this before I posted.

TBH I think that you are far from alone in trying the idea that you just did. I suspect that there are even advisors out there who will make the same mistake.

tim

But of course they will be taxed when money is eventually withdrawn from the fund to pay a pension. Except for the 25% tax free lump sum.

Also if the property is used by the SIPP holder he will either have to pay a market rent or be subject to a benefit in kind tax charge.

Two things. 1. For some unknown reason I did not use the existing fund to purchase the property, so assumed a personal contribution. 2. Surely the debt of 25,000 should come off the value of the fund?

Rob

Less borrowings of £25,000, so £75,000 in total, just the same as before.

No. They send a cheque for 22/78 of contributions, which in this case are £0, so £0.

No, it is £75,000

The total deemed, and actual contributions would be £0. No need to worry about contribution limits.