ISSUE 7/05

'Buy-to-let' with your pension!

By Jon Pryse-Jones

Jon Pryse-Jones

From 6 April 2006 it will become possible to use funds built up within a pension fund to buy residential property. If you are thinking of buying a property to let, then the financial advantages of using your pension could make this an attractive option:

• Rental income received from letting the property out will be tax free to the pension fund.
• There will be no Capital Gains Tax for the fund to pay when the property is sold.
• Funds built up within a pension fund will be available to use as a deposit and any new contributions will (subject to rules re maximum contribution levels) be tax allowable.
• Inheritance Tax will no longer be payable on death provided that no withdrawals have been made from the fund.

As things stand at present (and subject to various rules and conditions) it is possible for pension funds to be used to purchase commercial property but not residential, provided the commercial property is let at a full market rent. The rental income is also tax free to the pension fund.

The interesting news is that from 6 April 2006 the rules will be extended to allow pension funds to be used for the purchase of residential properties.

But there is another change coming too for commercial property buyers which means you should get your skates on. If you are planning on buying a commercial property, then from the 6 April 2006 the amount one can borrow from a pension fund drops from 75% of the purchase price of the property to 50% of the net assets of the fund.

A company running a corporate SIPP with net assets of £100,000 can borrow £300,000 today to support the purchase of a commercial property. From 6 April 2006 that same firm would only be able to borrow 50 per cent of the net assets of the fund or £50,000. The overall funds for commercial property investment would therefore reduce from £400,000 to just £150,000, more than halving the total funds at the firm's disposal.

So if you are in the market to 'buy-to-let', or looking to buy a commercial property then call us. We will be happy to put you in touch with an IFA who will be able to provide you with specific details on how you can make best use of your pension fund.