An Opportunity Not to be Missed?

"Whatever the prospects for residential property, and in recent months there has been a good deal of conflicting press comment, it seems clear that at the moment the market is pausing for breath."

The rise in interest rates, growing personal debt, the inability of first time buyers to find affordable properties, are all contributory factors. In April next year however, pension reforms will bring about two important changes which will undoubtedly be of interest to the residential property investor.

Firstly, it is proposed that residential property investment is allowed within personal pension plans - currently only commercial property investment is allowable. In addition, the current caps on pension contributions will be removed; it will be possible to contribute up to 100 percent of annual taxable earnings (from employment rather than from rental or other investment income), to a maximum of £215,000. This limit will gradually be increased over the following years.

Of course the main benefit of pension investment will remain, in that tax reliefs will continue to apply for both basic and higher rate tax payers.

So what does this mean for the property investor? Very simply an excellent opportunity to buy property with help from the Inland Revenue and, in doing so, generate tax free income and capital gains, and improve prospects for your retirement fund.

Whilst the adage "don't let the tax tail wag the investment dog" still applies, many commentators consider that the new legislation will provide a boost to the property market. Whatever type of investor you are - whether you have an existing portfolio of buy-to-let properties, a single holiday property either here or abroad, or are simply considering property as an alternative to cash or shares, then the new pension legislation presents opportunities which are difficult to ignore.

So how will you be able to take advantage of these changes? In practice, the best route will be to set up a Self Invested Pension Plan (SIPP). There are already a number of companies providing SIPPs, and by next year there may be many more, so the services of an investment adviser will be required to choose the right one. Once open you will need to make a contribution into the SIPP, which as noted can be up to 100% of your annual earnings.

For a higher rate tax payer, every 60p you contribute will ultimately generate tax reliefs totalling 40p, so for example a £100,000 gross contribution into a SIPP will, in effect, have only cost you £60,000. The SIPP monies can then be used to purchase either a new property, or one or more of your existing properties if you are already an investor. Whilst there may be capital gains considerations in selling an existing property to your SIPP, pension contributions receive reliefs at your highest tax rate, and remember that once in the SIPP all future capital gains and rental income will roll-up free of taxation.

In some cases it may be necessary to arrange short-term finance; an experienced property lawyer will be able to help with this, and the conveyancing aspects, to ensure that the transaction is completed quickly and smoothly.

The new legislation will also enable the SIPP to borrow up to 50 percent of the purchase cost by way of a mortgage, so the investor can consider larger property purchases, servicing the borrowing from the tax-free rents generated, or from further personal pension contributions.

As with any financial planning there will be personal, taxation and cost considerations to take into account. However, the new legislation will give rise to the most significant pension reforms for decades and in doing so provide excellent opportunities for the property investor.