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bird101

New Sipps Property Scheme Is Too Little, Too Late

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I dont think we've got anything to worry about with the new SIPPS property scheme.

On the face of it it looks pretty worrying to an FTB. I've been reading up on it, and it is not resticted to earnings - only the refund you receive is limited to your earnings. So an earner on £200k who is paying £70k in tax can transfer £180k from his existing SIPP (Self-Invested Personal Pension) fund, or borrow it, and get £70k back in tax. A guy on £90k (not uncommon at all in London) paying £35k in tax can buy a £90k property (there are still plenty around) and get his £35k tax back. The following year they can do the same again. It's VERY attractive.

Lots of SIPP owners are going to go for this because in the current market they're virtually guaranteed a 5% return on invested capital (8-9% on their actual outlay) - and their investment is covered even if the market falls by 40% - there arent many investments around that can promise that. We're going to see property developers, financial advisers and lettings agents forming JVs to produce, sell and manage these schemes to the wealthy.

The structure of the scheme also means that the most attractive market for these is the FTB's market, entry-level rabbit hutches. This will definitely support the housing market to some extent - it's the entry-level that's bottlenecked at the moment.

If the economy depended purely on the continued stability and rotation of the housing market, the new SIPP scheme would be enough to prop up the housing market and hence the economy. The trouble is that there is a much bigger factor at play here - consumer confidence - which is MUCH bigger than the housing market, and is falling.

Even if every high earning SIPP owner bought into the scheme (which is pretty likely in my view!) it wont make much of a dent in the huge volume of unsold housing stock, and even if it did, does GB really imagine that HO's will just carry on as normal in this jittery market? I dont think so. In a fallikng market, I think for every 100 houses bought through SIPPs there will be 50-60 sellers who breathe a sight of relief, bank their gains and join the STR market.

Additionally, it's too late for a measure like this. The property market UK-wide has risen by 1.8% in the last 4 quarters, including a fall of 0.2% in the last month, that's the lowest annual rise since '96 - the end of the last recession. By next April when this new legislation comes into force (7 months away) our economy will be in free-fall.

It's just a feeble measure by a chancellor transparently desperate not to inherit a recession during his turn in the top job, and yet another measure to disadvantage the debt-addled and electorally insignificant younger generation. If it works it will be a social disaster, if it fails it will be a political disaster. This must be the only supposed 'left-wing' government in history to so actively re-distribute wealth from the poor to the rich.

I like this much-quoted analogy:

" Equity markets can turn on a sixpence, it takes 2 minutes to sell a million shares. The housing market is like a supertanker .... It can take fifty miles to change direction. But once it's changed direction, it just keeps on going."

Interested to hear comments on this

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I'm losing the will to live a little with all these different Sipps-related threads.

I agree with your headline.

You are right that someone who already has £180k in his Sipp can use this to buy property... but he has already had the tax break, he doesn't get another tax break for selling equities and buying property. So he would only do this if he believes he will get a better return from property than from equities (or wherever the £180k is currently invested).

I would also question how many people actually earn £200k - sure, people do but we are talking about a few people who will have minimal impact on the market as a whole. I would suggest that £90k is actually uncommon, even in London... we are STILL talking about a small number of people (and even smaller once you strip out those who could afford to do it but won't).

I'm not sure I fully understand what you mean about borrowing the money and getting the tax back on it.

As for the £90k guy buying the property etc, he can do the same thing and invest in equities - and get a better return than on property. The country seems to be focused on property at present at the expense of every other asset class possible.

It is a strange world... but it is not reality (imagine if you could have done this last September - and got 1.8% plus rental yield on property or 20%+ on a FTSE 100 tracker... which is the better result, even if you are 50% geared on the property?).

Peopel who do buy residential property get the rental yield (5% you say) but they get this on money market funds without risk. Intelligent people want a good risk premium... so perhaps unintelligent people with wads of cash might go for it?

They are not protected from 40% falls. They have £180k in their pension, if prices fall 40% they have lost £72k in their pension. They ARE £72k poorer while they could have been richer had they bought a good investment. This would be a VERY expensive mistake and they would have to be pretty dim to tell themselves it was a good result.

I pretty much agree with the rest of your post (see today's other threads on Sipps).

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You are right that someone who already has £180k in his Sipp can use this to buy property... but he has already had the tax break, he doesn't get another tax break for selling equities and buying property. So he would only do this if he believes he will get a better return from property than from equities (or wherever the £180k is currently invested).

They are not protected from 40% falls. They have £180k in their pension, if prices fall 40% they have lost £72k in their pension. They ARE £72k poorer while they could have been richer had they bought a good investment. This would be a VERY expensive mistake and they would have to be pretty dim to tell themselves it was a good result.

I pretty much agree with the rest of your post (see today's other threads on Sipps).

Check out the articles I read:

I cant find yesterdays headline article online but here are the others I read

http://www.timesonline.co.uk/article/0,,2-1806025,00.html

http://www.timesonline.co.uk/article/0,,630-1804510,00.html

http://www.timesonline.co.uk/article/0,,542-1805780,00.html

You're right, investors cant transfer assets from their SIPP and get the tax break, but they can from other assets. I dont know the exact rules for borrowing for SIPP investments, but I'd imagine there are a million loopholes that make it possible. Bear in mind that since the new rules on assets transferred into SIPPs will be unregulated for 12 months the market is wide open for all kinds of sharks.

However, investors ARE protected for a fall of up to 40% on their capital. To quote your example, If they but a £180k house for their SIPP, a high earner receives a £72k tax rebate on that investment, so it only costs him £108k in hard cash. Therefore even if the value falls 35%, they're still up on the deal.

Having said all that, and acknowledging the huge potential appeal to a high taxpayer (almost every high taxpayer would prefer a speculative investment-based tax rebate to paying tax!) I'm afraid I still think that this just isnt going to have the impact everyone thinks it is. Gordon Brown isnt foing to turn the market around with this one desperate measure.

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but he has already had the tax break, he doesn't get another tax break for selling equities and buying property. So he would only do this if he believes he will get a better return from property than from equities (or wherever the £180k is currently invested).

I keep making this point - nearly everyone disregards it. Can everyone please think about the staement in RED above and either shoot it down or shut up about it!!

However, investors ARE protected for a fall of up to 40% on their capital. To quote your example, If they but a £180k house for their SIPP, a high earner receives a £72k tax rebate on that investment, so it only costs him £108k in hard cash. Therefore even if the value falls 35%, they're still up on the deal.

No they are not protected. Read his post again!

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I keep making this point - nearly everyone disregards it. Can everyone please think about the staement in RED above and either shoot it down or shut up about it!!

No they are not protected. Read his post again!

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I keep making this point - nearly everyone disregards it. Can everyone please think about the staement in RED above and either shoot it down or shut up about it!!

No they are not protected. Read his post again!

Sorry Casual, but if you get a £40k tax rebate for a £100k investment, then if that asset drops in value by £35k you're still better off than if you had just paid the tax. In which case you're covered if the value falls. Please explain why that doesnt work!

Also, I agreed with London Loser over the "second tax break" issue as you can see in my last post. So why are you going on about it?

Best regards

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Some SIPPS information just for you.......

How will the property investment work?

From 6 April, investors can buy a new property from existing funds in their Sipp or by using their annual contribution limit (set at the lower of £215,000 or their earnings for 2006/07). The property could be one they already own as a buy-to-let or holiday home, for instance - although there would be fees to pay such as stamp duty, land tax and conveyancing costs. The Sipp will be able to borrow up to 50 per cent of its assets, so if the Sipp has £200,000 in it, it could borrow another £100,000. This borrowing could be used to help buy the property, and the loan interest and repayments would be costs of the Sipp. Users of the property (whether buy-to-let tenants or the Sipp-plan holder living in his or her own home or visiting a holiday home) need to pay a commercial rent. The rental goes into the Sipp as non-taxable income.

What are the disadvantages?

There are plenty. Sipp charges are discussed above. As also outlined above, if the Sipp planholder uses the property, they have to pay a commercial rent for the use. There is another option, but this is also expensive: if they do not pay rent, they will be taxed at between 40 and 55 per cent of the commercial rent (even if they are not taxpayers). Owning one's own home through a Sipp is unlikely to be attractive for many people. As homeowners already get relief from capital gains tax on their principal private residence, Sipp-holders would lose that exemption by putting the property into a Sipp. Regarding inheritance tax, there would be relief from IHT if the Sipp-holder died before retirement, but the Inland Revenue is setting up special rules, which are likely to see such properties taxed at 35 per cent (a small saving on the 40 per cent IHT rate) if the Sipp-holder dies after retirement with his or her main residence in a Sipp. [The Inland Revenue's full set of rules might not be published until just days before SIPPS is launched in the UK]

Sippdeal's research has found that few people are planning to hold their main home in a Sipp. The need to pay rent would also put many potential investors off going down this route for second homes. And there could be complications if you used it for a property abroad. 'Some countries don't recognise trusts,' says Donna Bradshaw, of the independent adviser IFG, referring to the fact that your pension fund, not you, would own the property in trust. 'And holding overseas property within a pension might not shelter it from local taxation.'

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Sorry Casual, but if you get a £40k tax rebate for a £100k investment, then if that asset drops in value by £35k you're still better off than if you had just paid the tax. In which case you're covered if the value falls. Please explain why that doesnt work!

Also, I agreed with London Loser over the "second tax break" issue as you can see in my last post. So why are you going on about it?

Best regards

Look, I draw a pension now from a conributory pension scheme I was in for 30 years. I got tax relief at my marginal rate - 40% in the latter part of my career.

Now, I don't buy shares and think "well, it doesn't matter if they fall in value - I got a 40% discount on this money"

See?

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Look, I draw a pension now from a conributory pension scheme I was in for 30 years. I got tax relief at my marginal rate - 40% in the latter part of my career.

Now, I don't buy shares and think "well, it doesn't matter if they fall in value - I got a 40% discount on this money"

See?

BTL is a fairly attractive investment in it's own right, and to a high earner thinking about BTL investments this is a 40% discount on what he would have paid for the privilege before. That's a lot of financial insulation! Plus his return on investment is tax free.

Hope your pension's working out for you.

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BTL is a fairly attractive investment in it's own right,

Not with negative yields it's not!

That's a lot of financial insulation!

Aarghhhhh! I officially give up! (the words brick and wall spring to mind!)

Hope your pension's working out for you.

Thanks. Certainly beats working!

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BTL is a fairly attractive investment in it's own right, and to a high earner thinking about BTL investments this is a 40% discount on what he would have paid for the privilege before. That's a lot of financial insulation! Plus his return on investment is tax free.

You are making the classic psychological investment mistake of "ringfencing", i.e. letting the source of funds influence investment decisions and thus giving a certain portion of the investment portfolio a special status because of unrelated external factors. For example, if someone has an unexpected windfall, like an inheritance or lottery win, they will be tempted invest that particular fund applying different investment criteria (often riskier investments).

The fact that the contribution to the SIPP enjoyed 40% tax relief is completely unrelated to the subsequent invetsment decision. To say that "one has a 40% cushion against falls" is a classic case of the ringfencing fallacy, by allowing the unrelated fact of a tax relief to influence the investment decision. Every investment decision should be made soley on its own merits. So the investor has to ask himself "is this BTL property a good investment?". As the choice of investment is free within a SIPP (once the 40% tax relief has been obtained), it is a grave psychological mistake to let the investment decision be influenced by the unlrelated fact that tax relief was given.

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You are making the classic psychological investment mistake of "ringfencing", i.e. letting the source of funds influence investment decisions and thus giving a certain portion of the investment portfolio a special status because of unrelated external factors. For example, if someone has an unexpected windfall, like an inheritance or lottery win, they will be tempted invest that particular fund applying different investment criteria (often riskier investments).

The fact that the contribution to the SIPP enjoyed 40% tax relief is completely unrelated to the subsequent invetsment decision. To say that "one has a 40% cushion against falls" is a classic case of the ringfencing fallacy, by allowing the unrelated fact of a tax relief to influence the investment decision. Every investment decision should be made soley on its own merits. So the investor has to ask himself "is this BTL property a good investment?". As the choice of investment is free within a SIPP (once the 40% tax relief has been obtained), it is a grave psychological mistake to let the investment decision be influenced by the unlrelated fact that tax relief was given.

A far more eloquent version of the very point I tried to make - thanks :)

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BTL is a fairly attractive investment in it's own right, and to a high earner thinking about BTL investments this is a 40% discount on what he would have paid for the privilege before. That's a lot of financial insulation! Plus his return on investment is tax free.

Hope your pension's working out for you.

troll

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You are making the classic psychological investment mistake of "ringfencing", i.e. letting the source of funds influence investment decisions and thus giving a certain portion of the investment portfolio a special status because of unrelated external factors. For example, if someone has an unexpected windfall, like an inheritance or lottery win, they will be tempted invest that particular fund applying different investment criteria (often riskier investments).

The fact that the contribution to the SIPP enjoyed 40% tax relief is completely unrelated to the subsequent invetsment decision. To say that "one has a 40% cushion against falls" is a classic case of the ringfencing fallacy, by allowing the unrelated fact of a tax relief to influence the investment decision. Every investment decision should be made soley on its own merits. So the investor has to ask himself "is this BTL property a good investment?". As the choice of investment is free within a SIPP (once the 40% tax relief has been obtained), it is a grave psychological mistake to let the investment decision be influenced by the unlrelated fact that tax relief was given.

Thanks Bubble, I'm familiar with the term. However my point is that the new SIPPs rules make BTLs look good for high earners who may have been toying with the idea up to now.

But as I said at the start of this thread, however attractive it is, it's not going to be enough to prop up the housing market which is in irreversible decline. All it will do is invite investment and a whole new batch of un-regulated mis-selling of BTLs - which is primed to be the next scandal of this administration.

The tragedy is that this government, having claimed it is committed to helping FTB's get into the marketplace, has proved to everybody that it's as meaningless as their commitment to reduce congestion on the roads, or to end the "boom and bust" cycles. They're just full of crap, and now they're desperate with this flimsy effort to hold together the over-inflated consumer economy by this vain attempt to prop up the housing market with subsidised second homes for the wealthy.

All projections are that this is going to cost the tax-payer £2-3bn a year. Had the chancellor decided instead to help the beleaguered younger generation of potential FTBs (like myself) with a tax break to help them get into the property market, it might actually have done some good all round.

But tragically the labour party cant see past the fact that 60% of the electorate is the baby-boomers - over 50's. Hence the younger generation, already starting our adult lives with huge student debts, poor graduate job prospects, the highest level of direct taxation in British history, an inaccessable property market, AND an expectation to finance the economy to pay the pensions of the already wealthy baby-boomer generation, are now being expected to finance this huge subsidy to the rich.

Maybe this whole house of cards is going to hit the floor spectacularly in this upcoming recession, or maybe we'll carry on muddling through and re-float to another boom next week. But my savings are staying in the bank!

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Had the chancellor decided instead to help the beleaguered younger generation of potential FTBs (like myself) with a tax break to help them get into the property market, it might actually have done some good all round.

A tax break? That would just cause prices to rise even further.

And your income tax bill would rise.

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Sorry Casual, but if you get a £40k tax rebate for a £100k investment, then if that asset drops in value by £35k you're still better off than if you had just paid the tax. In which case you're covered if the value falls. Please explain why that doesnt work!

But you don't get a tax rebate on buying a house. You get a tax rebate on putting money into your SIPP. If your SIPP then uses it to buy a house, and the house falls in value, then your SIPP has lost money. The source of the money is irrelevant, your pension is still worse off than it would have been if you'd put the money into some other asset.

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But you don't get a tax rebate on buying a house. You get a tax rebate on putting money into your SIPP. If your SIPP then uses it to buy a house, and the house falls in value, then your SIPP has lost money. The source of the money is irrelevant, your pension is still worse off than it would have been if you'd put the money into some other asset.

Give it up Zorn. I've tried about 5 posts to put that point across: Bird's tactic is to completely ignore it and come back with talk about "insulating against price falls".

I'm beginning to think he's trying to wind me up.

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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