More column inches have been devoted to the subject of residential property than almost any other aspect of the A-Day changes. As of next April, higher-rate taxpayers will be able to buy a house with an effective 40% discount on the asking price, while basic-rate taxpayers will get a 22% discount.
The most you can borrow will be 50% of the total value of the fund, which means a Sipp fund standing at £100,000 would enable you to buy a £150,000 property. Currently, although you can only invest in commercial property, the rules are more generous, allowing you to apply for a loan of up to 75% of the value of the property purchased, so if you want to invest in commercial property, act fast.
There are disadvantages to investing in residential property. Your pension fund will have to bear all the costs associated with buying a house, including legal fees and stamp duty. Although rental income from others is free of income tax, and you will avoid capital gains tax on the sale, you will have to pay market-rate rents on the property whenever you use it.
Overseas properties pose their own problems as several European countries do not recognise the concept of trusts, which is how all British pensions are structured. If you sell a property you already own to your pension fund, you will still have to pay stamp duty and stump up for the legal fees twice, as buyer and seller.
Investment experts say that you should not hold more than 20% of your pension fund in property. Property is already the “most tax-advantaged” asset you can own, says Roger Bootle in The Sunday Telegraph: you live in it tax-free and, provided it is your primary residence, sell it tax-free. There is also tax relief available on buy-to-let properties.
No wonder then that the majority of most people’s wealth is already tied up in property. If, on top of this, your pension fund comprises solely buy-to-let properties, you will be very vulnerable to the vagaries of the property market.
Since it is not hard to imagine that large numbers of people will extrapolate the spectacular returns on residential property in recent years and plough their savings into yet more, there is a danger that prices could be boosted artificially, making people all the more vulnerable.
So when you are considering buying a residential property for your Sipp, look at your asset allocation and ask yourself whether such an investment makes sense. If it’s not a good investment per se, the tax perks will not turn it into one.