Self Investment Personal Pension
(Purchase property through a SIPP 'pension wrapper')

6th December 2005 - THE BUDGET REPORT
The chancellor Gordon Brown, announced changes to planned reforms of Self Invested Personal Pensions (SIPPs ). From April people will be able to use money invested in SIPPs to buy residential property, but now on the purchase will face a one-off tax charge equivalent to 40% of the property's market value. This, in effect, negates any tax relief the saver would have received on making contributions to SIPPs. The Treasury took the step after widespread criticism that planned reform of SIPPs was nothing more than a tax break for the rich.

The new one-off tax charge will also apply when one places "tangible moveable assets" such as fine wines, classic cars and works of art into a SIPP.

See http://www.hmrc.gov.uk for further information or consult your financial adviser.

From April 2006 and if you are a UK tax payer, it will be possible to own property through your Personal Investment Plan even if it is a 'residential property'.

Any off-plan or property that will not be classed as inhabitable can be purchased before April 2006 and placed into your Self Investment Personal Pension scheme. Once in the scheme payments made for the property will be tax deductible in the same way that any other pension is tax deductible. As well as these possible tax benefits an addition bonus is that any income and capital gain generated by the property will also be tax free.

Buying property through a SIPP is not that straight forward and there are a mass of rules to consider and putting property into a SIPP means that it will have to stay there and will become the backbone of your pension. Once registered you will be able to buy and sell property while in the scheme and be able to withdraw a percentage of the value of the fund when you reach the age of 55, but not all of it. Although you will be protected from paying tax in the UK you will still be liable to pay any local taxes.

Crucially, any property purchased through a Sipp is not owned by you, instead it is owned by the pension fund and it is governed by trustees of the Sipp provider. The trustees are likely to be extremely strict about how your home is maintained and you will have to pay rent to stay in it, or be taxed on the benefit. If you put a holiday home into your Sipp or use the funds to buy one, you will have to pay a commercial rent to your pension fund whenever you or your friends use it.

Another thing to consider is that the authorities in neither Spain or Portugal recognise pension funds as trusts, so you'll still be taxed on the rental income and increase in value when you come to sell it. This may be the case with other countries too but at this point in time we aren't sure is this applies to Greece.

A SIPP is simply a tax-efficient pension wrapper and you decide which investments are put inside it. The company running the SIPP wrapper will charge for administering it, and there are associated costs when investments are bought and sold. Not all SIPPs are the same, and savers wanting to invest money regularly can find themselves encountering sky-high charges. This happens because some companies still look on SIPPs as a rich man's investment opportunity, instead of recognising that many are now being taken out by ordinary investors who want to save modest amounts of money on a regular basis. The problem is that some have fixed charges that take no account of how much or how little is being paid in. As a result, modest amounts of money can be hit by disproportionately high fees. It is therefore advisable to look at the 'small print' and check the annual and other charges levied, before committing yourself to a specific SIPP fund management company.

Note: this is for general information only
Always seek specialised advice specific to your own circumstance