NEW TAX RÉGIME FOR PENSION PLANS
A completely new set of tax rules for pension plans, and for contributions to pension plans, comes into effect on 6 April 2006.
Overall, the new régime will be simpler and will offer more choices for pension savers, but there are still some points to watch.
One widely-publicised change is that it will be possible for an individual to purchase a buy-to-let property within his or her personal pension scheme. This has been advertised as an opportunity to buy a house or flat at a 40% discount – on the basis that money paid into the pension scheme to fund the purchase will qualify for tax relief. Also, rental income and capital growth both qualify for tax exemption within the pension fund. The downside is, of course, that the money may only be withdrawn as retirement benefits in accordance with the usual rules for pension schemes.
There will also be an immediate practical difficulty in that, under the new tax rules, a pension scheme will not be able to borrow more than 50% of its nett value. Thus if the pension fund consists of a cash deposit of £100,000, the scheme could only borrow a further £50,000, making its maximum purchase a house or flat worth £150,000. Buying the same property by putting £15,000 into a new pension scheme and taking out a 90% mortgage will not be an option.
Again, in theory it will be possible to buy an overseas holiday home within a personal pension scheme – but here there will be even more problems. Firstly, a tax charge will arise if the family uses the property without paying a full market rent. More importantly, the taxes levied by the country in which the property is situated must be considered.
As a general rule, it will be necessary to purchase the property within a company, because most European countries do not recognise a personal pension scheme as a legal entity, and that company will be subject to local taxes on its income and capital gains. Even if the pension plan holder still wished to proceed on that basis, it might be difficult to show that the purchase was a suitable investment for the pension fund, given the potential overseas tax liabilities.
IMPORTANT: This newsletter deals with a number of topics which, it is hoped, will be of general interest to clients. However, in the space available it is impossible to mention all the points which may be relevant in individual cases, so please contact us for personal advice on your own affairs.