Government Tax u Turn

8th December 2005

T. Wyn Jones

A great deal has been spoken, many words have been written and a considerable amount of work undertaken as a result of the Government’s proposal to include residential property in self invested personal pension schemes (SIPPS) from April of next year.

Whilst appearing too good to be true the Government policy stated that in addition to commercial property residential properties could be included in self invested pensions and hence would receive the full tax advantage on investment, the income would be shielded from Income Tax and the capital would be excluded from any future Capital Gains Tax & Inheritance Tax calculations.

It was for these reasons so much work was undertaken in particular to try and use the legislation as a vehicle to mitigate any Inheritance Tax liabilities on death. Such was the forecasted take up it was felt it would have repercussions in the property market in that the “buy to let” market would see an upsurge thus increasing property prices.

However, as inferred, it was too good to be true as on the 6th of this month the Chancellor, Mr Gordon Brown did a complete U-turn and stated that the new legislation will remove all tax advantages in holding “prohibited” assets (including residential properties) directly or indirectly in self directed pensions.

In addition it is stated that if a pension scheme directly or indirectly purchases a prohibited asset both the pension fund and the administrator will be penalised.

Penalties include a 40% tax charge on the value of the asset, the administrator may be sanctioned to the tune of 15% of the value of the asset, there could be a further 15% charge on the scheme if the cost of the asset is over a certain amount and if the asset exceeds 25% of the value of the pension the scheme may be deregistered leading to a tax charge on the administrator of a further 40%.

So, if a pension scheme purchased a prohibited asset (say a £100,000 residential property) there could be a total tax charge of £70,000 on the scheme and it could be deregistered. If it was deregistered there would be a further 40% tax charge on the value of the asset.

To summarise the government has made it financial suicide if residential properties are placed into the pension pot.

It seems to me that you pay tax when you earn, pay tax when you spend, pay tax when you save and now there is even more chance that you will pay tax when you die. What appeared to be a way forward by prudent tax planning appears to have been identified by the Treasury who has now firmly shut the door.

On a more positive and happier note may I take this opportunity on behalf of the partners & staff of McCartneys to thank all our past and present clients for their continued support and business and may I wish them and you all a Merry Christmas and a Happy New Year.