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cju857arh

House Price Boom?

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I can't see the point of this developing into a thread. Look at the various threads and discussions on here that already address this issue.

The short answer to your question is - no.

Edited by Alfie Moon

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Hi All,

Has anyone else read this article on the BBC?

http://news.bbc.co.uk/1/hi/business/4245922.stm

Surely if you can put your pension funds into purchasing a second home and renting out tax free is going to mean a big house price rise?

Would anyone agree or disagree?

Andy

As I understand it this is getting more complicated by the minute. The full rules are not yet finalised from what I have read but if you buy a second property in your SIPP and don't rent it out you will be taxed - on your income - on the second home as a benefit in kind. So, if you buy and have a void for 3 months you are not only having to keep on paying the mortgage, you are paying more tax as well.

I have a SIPP. To put a property into it I would have to get a mortgage. Now do I want to borrow to buy a depreciating asset to put into my pension? And get charged tax on it if I can't rent it out?

The average size of a pension pot when people retire is something paltry like £25k. So to do this most people will need a mortgage on their second property.

The only advantage I can see is that if (in this area) you have a spare 200k hanging about which you normally would be about to pay tax on, you could buy a property with it and stick it in your SIPP and avoid paying tax on it. It's just like being able to make a massive contribution to a pension really. Would you want to borrow to do it? Answer: yes if you think the market is going to rise inexorably. Yes if the horizon (retirement date) is more than 20 years away. Otherwise: No.

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As I understand it this is getting more complicated by the minute. The full rules are not yet finalised from what I have read but if you buy a second property in your SIPP and don't rent it out you will be taxed - on your income - on the second home as a benefit in kind. So, if you buy and have a void for 3 months you are not only having to keep on paying the mortgage, you are paying more tax as well.

I have a SIPP. To put a property into it I would have to get a mortgage. Now do I want to borrow to buy a depreciating asset to put into my pension? And get charged tax on it if I can't rent it out?

The average size of a pension pot when people retire is something paltry like £25k. So to do this most people will need a mortgage on their second property.

The only advantage I can see is that if (in this area) you have a spare 200k hanging about which you normally would be about to pay tax on, you could buy a property with it and stick it in your SIPP and avoid paying tax on it. It's just like being able to make a massive contribution to a pension really. Would you want to borrow to do it? Answer: yes if you think the market is going to rise inexorably. Yes if the horizon (retirement date) is more than 20 years away. Otherwise: No.

Totally agree,

The only people I hear talking about Sipps leading to the next demand boom in property do not understand the facts. If they actually ran through a scenario they would see in most cases it is a no go.

How do you get sufficient money into the pension in the first place?

Who actually owns the property?

What happens when there are no tenants to pay the mortgage?

What happens when I want to sell?

Who would want to invest in an asset that is likely to fall in value over the next few years?

Even if you can borrow money, why erode the equity within your pension fund due to the negative effects of gearing?

Subject to the fact that this legislation actually goes ahead, yes there will be some who choose to buy property, but the vast majority who are supporting this arguement are those who make their living from property and are desperate not to see property fall in value as their lives will be materially affected.

There has been lost of discussion on this site on Sipps and in general I think it has been very balanced and is way ahead of the thinking of the media and the general public.

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The Myth About SIPPs

To debunk SIPPs once and for all, a very brief (and thus not accurate in all details summary):

1. A SIPP is a self-invested personal pension. These have existed for a long time. They are nothing other than personal pensions, which have also been around for a long time, in which the beneficiary can make his/her own investment decisions, rather than putting the money in (often poorly performing and high charging) unit trusts. There is nothing new about SIPPs. The only thing that is new from April 2006, is that most restrictions about the classes of assets in which SIPPs can invest will be lifted. Right now, SIPPs can only invest in shares, bonds and commercial property. From April 2006, they will be allowed to invest in just about anything, including residential property.

2. A SIPP fund, like any other pension fund, is a fund separate from the personal assets of a person. The SIPP funds are legally owned by a trustee for the benefit of the person whose pension the SIPP will eventually provide. The SIPP fund is therefore not legally owned by the beneficiary; this is very important, as we will see in a moment.

3. There has always been tax relief on contributions to personal pensions. As SIPPs are personal pensions, contributions to the SIPP fund also enjoy tax relief. There is nothing outrageous about this. Personal pensions are taxed at the time the pension is paid out, as the pension drawn from the SIPP fund will be taxed as income. What will change from April 2006 is that the annual contribution limits have been greatly increased (to £215k) with an additional lifetime cap. This gives higher flexibility, because now someone can make higher contributions, for example during years when their earnings are high. This may, for example, benefit professional women, who might make very high contributions during the years before they give up a career to have children.

4. Tax relief is given on pension contributions at the marginal rate of tax. In other words you need to be a higher rate tax payer in order to get 40% tax relief on contributions to a SIPP. This is completely ignored in the current hype, as there seems to be a general assumption that everybody will get a 40% "discount" when "buying assets thorug a SIPP". This is not correct. If you are not a higher rate tax payer, then you ain't get 40% tax relief. Period. This already rules out the majority of the population from the "40% discount".

5. Tax relief is, by definition, given only up to the amount of income tax liability in any given tax year. In other words, you can only get as much tax relief as your income tax bill is in any tax year. (subject to an absolute annual limit of £215k) This prevents all but the highest earners from "buying a property through a SIPP". Uninformed writers talk about people "putting £100,000 in a SIPP and getting £40,000 back". You need to have a tax bill of £40,000 in that tax year in the first place to put £100,000 in a SIPP. We are now looking at a very tiny fraction of the population who will be able to make such contributions to a SIPP.

6. From April 2006, the borrowing rules for SIPPs will also change, and it will be more difficult for a SIPP to borrow money. The SIPP will only be able to borrow 50% of its assets (prior to the property purchase). At current house prices, even the cheapest typical investment properties (2 bed flats) start at £150,000. You would need £100,000 already in your pension to make such a purchase. Even if you have £100,000 in personal fortune, you would most likely not be able to transfer this money into a SIPP, unless you have a £40,000 tax bill (see above). Except for a tiny number of wealthy and very high earning people, the whole idea just does not work.

7. Assuming someone has enough funds in their pension to buy a property, the idea of transferring existing property held outside the SIPP into the SIPP is still fraught with difficulties. As the SIPP funds are legally owned by a trustee, the trustee must buy the property. This will trigger stamp duty, as well as capital gains tax (if there was a gain) in the case of a BTL property. If the property is one's own residence, one must pay a market rent to the SIPP trustee.

The long and the short of this all is: unless you are a very high earner, it is virtually impossible to put enough money into a SIPP in order to buy residential property

Now, in light of this, let's look again at the claims made in the press:

"property can be bought at a 40% discount when bought through a SIPP" - Nonsense. The SIPP fund will pay the normal price for a property. It is when the contributions to the SIPP were made that a 40% tax relief was given, but one can only get tax relief up to one's tax bill, and 40% tax relief is only given to higher rate tax payers.

"existing property can be transferred to a SIPP" - Nonsense. Nothing can be "transferred" to a SIPP. If one wishes to "transfer" an asset to a SIPP, the SIPP trustee must buy it from the beneficiary at the market price. In order to do so, the money to pay for the asset must already be in the SIPP, which can only have happened through contributions. And these, as we have seen, are limited by one's tax bill.

So why the hype about SIPPs? Why are the falsehoods peddled by the financial advisers and property developers? Surely, when it comes to actually carrying out the transaction, most people will realise that they cannot do it within the rules. The reason there is such a hype now, is that SIPPs are being used by shady characters to sell their products (such as BTL flats, wine etc.) now on the back of expectation that "next year, when SIPPs come in, prices will go through the roof". Indeed, fine wine prices have already risen by 20% in last three months, even though SIPPs are not even coming in until April next year. Once people start realising next year, that only a small minority will actually be able to really benefit from the SIPP rules, the hype will evaporate, and wine prices will collpase again, and this will also be the final straw for the BTL market.

I hope this now clears things up once and for all.

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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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