A scheme allowing people investing for their pension to take advantage of holiday properties has been referred to as ‘toxic’.
Many administrators have even revealed that they will not allow these types of assets to be held, this is because only commercial property is allowed as an investment for a pension.
Current rules dictate that investors cannot hold residential property in a self-invested personal pension (SIPP), especially if they are directly invested in the property.
These assets include holiday lets, cottages or any other building that is deemed residential. However, recent years have seen more and more schemes allow investors to buy shares in firms that own holiday lets, rather than owning the holiday homes themselves.
Taxman concerns
This may seem like a smart work-around of the restrictions, as investors then benefit from both dividends and tax-free growth. However, many SIPP administrators remain wary of these schemes because of concerns about trouble with HM Revenue & Customs. Should HMR&C regard the assets as residential property, any investor’s personal pension could be hit with a big tax levy.
Martin Tilley, of Dentons Pensions Management, called shares in holiday lets a “potentially toxic asset,” as ownership or part-ownership of these essentially residential properties could create problems with the taxman. He suggested that “each and every opportunity be reviewed” by appropriate authorities on the matter, since “many schemes will have fallen foul of this problem.”
Criterias
Some schemes may make the grade and not run the risk of tax-evasion. However, the conditions concern both the “terms of ownership” and the value of the assets that are held, making it very difficult for holiday property lets to meet the proper conditions.
One shareholder cannot own more than 10% or more of the share capital of the company. Pension experts also say that SIPP investors need to remain at “arm’s length” from their holiday assets if they want them to remain lawful. This means the investor should not gain the right to stay at or use the holiday property during any time that they are investors.
Equity in companies
However, in the recent past there has been a shift in the attitude towards this type of investment, with many schemes allowing investors to get around rule. In fact there has been a rise in the take up of this asset class. Investors are allowed to buy equity in companies that own holiday lets, which can be included in their pensions.
With people looking at various options to supplement their retirement income, it is important to remember that everyone in the UK is eligible for the state pension. This is an income that is provided by the Government, and while it is only satisfactory it can help increase the income that is received in retirement.
With the traditional pension suffering at the hands of the economy, a growing trend among investors is to use property to generate the income they would need for their golden years. The housing market has been one popular destination, with many looking at buy-to-let for their retirement income. Those that have money to spend, are also looking at this market because of the possible rise in property prices over the long-term future.
Policing
Taking the equity route with holiday lets is not a move that is favoured by SIPP administrators, this is because policing the scheme is difficult due to their structure and restrictions.
Greg Kingston, spokesman for Sipp provider Suffolk Life, has said: “We do not consider these sorts of investments due to that lack of oversight and ability to have ongoing monitoring of the investment.”