Christine Hallett outlines how professional partnerships can take a special pension to invest in property

Would you like to invest in property or land in such a way that:


• All rental income is received gross;


• All capital growth is gross - that is, no capital gains tax in disposal;


• You can reclaim the VAT;


• There is potential to pay out death benefits with no inheritance tax?


If the answer is yes, you may be surprised to learn that it is possible and many partners in law firms or sole traders are already benefiting from it. But it is equally surprising how many of us are unaware of the concept and the ability to do it. The route is to invest in property via a pension arrangement, by establishing a self-invested personal pension (SIPP).

Building block: partners can make a sound investment

What is a SIPP? In brief, it is a special variety of personal pension. It is subject to the standard rules applicable to personal pensions generally (contained within Inland Revenue guidance notes, known as IR 76) but with some specific modifications that permit a wide range of investment options that include commercial property now, with residential property being allowed from April 2006.

All SIPPs are set up under trust, which the Revenue requires to be irrevocable. This means the trust cannot be wound up except in certain circumstances. This is to stop the member taking out any monies from the trust other than for those purposes specifically permitted under the legislation - in other words, a pension, and a one-off tax-free lump sum. For these purposes, it is usual for one of the trustees to be a professional trustee, whose job it is to ensure that the SIPP is managed in accordance with Revenue rules.


You can have a SIPP if you work for a company or are self-employed, provided you have ‘relevant earnings’ (this is a very wide definition and most employed and self-employed people have relevant earnings). Permitted contributions to a SIPP attract full tax relief and the amount you can contribute is determined currently by a percentage of net relevant earnings depending on your age.


You can also transfer existing pension arrangements into a SIPP - for example, insurance contracts or deferred pensions with previous employers. But you would need to take advice if you were to consider transferring current arrangements.


The main categories that cannot have a SIPP are: those already in an occupational pension scheme (you can leave that scheme and set up a SIPP instead if you considered it more appropriate; however, you would need to take specialist advice as many occupational schemes are still very valuable); and those who are in receipt of a pension and have no other deferred pension arrangements or relevant earnings. You cannot transfer a pension that you are drawing into a SIPP.


Are there any downsides? A SIPP is a pension scheme and as such no benefit can be taken before age 50 (55 after 2010), so your investment is tied up until at least then. But when you take benefits, up to 25% of the fund can be taken as a tax-free cash sum (another tax advantage) and the rest must be taken as income over the remainder of your life.


If it were appropriate, virtually the whole of your SIPP could be invested in property. Additionally, you can take out a mortgage with your SIPP of up to 75% (this will change in 2006) of the proposed property investment, including acquisition costs. In other words, if you have £100,000 in your SIPP, you can buy a property with that SIPP of up to £400,000 (provided a lender is willing to loan up to £300,000 for the property selected). A SIPP can also invest in more than one property.


SIPPs can also club together to buy a larger property. For example, ten partners in a law firm each with a SIPP of £100,000 could potentially, subject to the mortgage, invest in a property up to £4 million from which to occupy and run their business.


There are several benefits of investing in property via a SIPP. For example:


• Property purchased for £250,000;


• Annual rental income: £25,000;


• Rent increases at 5% annually;


• Capital appreciation averages 5% annually;


• Property is sold after ten years;


• Total income (rent and capital) under SIPP comes to £723,000;


• Total income personally (if tax is 40% on income, 40% on capital gains) comes to £533,000;


• Extra return comes to £190,000, or 36%.


With taper relief on capital gains tax, the extra return is reduced, but in most cases it would still be around £150,000, that is to say, 60% of the initial investment as an added return. In addition, the VAT is fully recoverable under a SIPP, and the VAT is nearly another £44,000.


This makes sense for any professional partnership. It also provides for succession planning. As retiring partners leave and junior partners join, there are opportunities for junior partners to purchase the share of the retiring partners or a part of it. It is also possible for retiring partners to maintain the capital investment and receive their pension from the rental income.


Christine Hallett is the managing director of SIPP Solutions