To add to all the fun that already surrounds pensions, the Government decided to "simplify" pensions by introducing a set of not so simple rules to be welcomed on "A-Day" (6^th April 2006).

The most exciting (honest!) change that this will bring is the relaxation of rules to allow residential property to be held in a SIPP. The legislation has not yet been finalized so watch this space.

This is an exciting opportunity for homeowners who wish to purchase another property to utilize for buy to let purposes. However, you need to be very careful, as there is more to this than meets the eye initially…

A SIPP is a Self-invested Pension Plan. It is basically like a basket in which you put investments of your choice such as shares, unit trusts, gilts, investments trusts, insurance company funds, derivatives, traded endowments, cash, commercial property, and now private property. You are permitted to chop and change these investments but you can’t withdraw any funds until you actually retire.

Let’s compare the situation for an individual who owns their buy-to-let property or for a pension scheme that owns the buy-to-let property.

• If there isn’t a mortgage, the rental income is received tax free by the pension fund.
• If there is a mortgage, the pension scheme borrows to buy the property, and the rental income is offset by loan repayments and other related expenses.
• The maximum borrowing that a pensioneer trustee can have on behalf of a member is 50% of the value of the member’s fund (and not a percentage of the value of the property).
• The property cannot be used as security for personal borrowing.
• Any use by the individual or connected parties at non-commercial rates will be subject to tax. (I.e. there will not be additional tax if your pension scheme charges you a commercial rent for use of the property - and you pay it.)
• There will be no capital gains tax to pay on the proceeds. In addition, the proceeds must be held within the scheme and used to provide benefits.
• On death, there would generally not be any IHT to pay, but the exact consequences differ depending on whether the death occurs before or after drawing the scheme benefits. The benefits that can be drawn depend on whether the property is sold or not.

1. If you might want to draw benefits from your pension in the short term, you will need to make sure that you have sufficient liquid assets in your pension fund.
2. There is still speculation surrounding the housing market. If you already own one or more homes, are you happy to increase exposure to just one asset class?
3. There may be substantial fees etc charged by the actual pension providers. Few providers have already set out their costs. In addition, a pensioneer trustee (external) will have to be appointed to manage the scheme within tax legislation for compliance purposes and also to avoid abuse. She/he may wish to appoint someone to look after the day to day management of the property. This will increase the cost of such a scheme. (In the past, this has been something the vast majority of "buy-to-let-ters" do themselves to try to keep costs to a minimum.)

Whatever your personal situation, it is definitely worth taking professional advice before you take the plunge.

Good Luck!

Mac Kotecha (FCA) is a Chartered Accountant who deals exclusively with dentists and has been established for over 25 years. His company offers Accountancy, Taxation & Payroll services in addition to invaluable advice on practice management, buying/setting up a practice and other dental issues.

Contact him on 020 8346 0391 or go to www.specialistdentalaccountants.co.uk to learn more.