Currently residential property is excluded from the list of investments that an individual can hold in a Self-Invested Personal Pension (Sipp).

However, from April 6, 2006, residential property is one of a number of investments that will qualify as a Sipp, under the Government's proposed changes to personal pensions, and this will include a buy-to-let property or a holiday home, including overseas property. In addition units in residential funds will also be possible, so smaller investments can be made.

A Sipp comes with considerable tax advantages and a residential property Sipp will work in much the same way as a commercial property Sipp; the rental income goes directly to the Sipp with all rental income being tax-free, and when the property is sold, there is no capital gains tax to pay when you begin to draw down your pension in the requisite number of year's time. In addition the proposed Sipp rules allow the individual to borrow up to 50% of the fund to purchase the property with any mortgage repayments being paid out of the gross rental income in the fund.

Moreover, as a Sipp is a pension, investors who are higher rate taxpayers will in effect be getting a 40% discount on the property they acquire courtesy of the Government.

All of this makes residential property Sipps sound very attractive, but a note of caution is advisable; you first have to create your own Sipp with a Sipp provider. The provider then acts as trustee for the pension fund and will have the final say on what property they will accept. You as beneficiary of the fund cannot be a trustee. As Sipp providers are not regulated, the system could be open to abuse. A further concern is the individual country tax implications when buying a foreign property. Income tax, CGT and Inheritance tax may all be payable in the host country therefore sound professional advice is thoroughly recommended.

Savills, 05.12.2005

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