Business Money – Finance and Banking for Business

The rise and rise of property prices

February 2005

2006 property boom predicted on back of pension reform

Mark Alexander

The 2006 April pension reforms could have a tremendous knock-on effect in the UK property market, creating the potential for an imminent property boom. Mark Alexander, managing director of The Money Centre, explains why they will have an exciting impact on the potential for returns on investment in the buy-to-let market.

Currently, property investors can use their pension to invest in a utilised property fund. This is restricted to investment in property company shares and the commercial market only. Alternatively individuals can set up a Self Invested Pension Plan (SIPP), which can be invested in a single commercial property of the investor’s choice. When I ﬁrst heard property investors could use pension schemes to purchase buy-to-let residential property I was sceptical.

Within existing SIPP rules there existed a need to amortise debt over 10 years and prior to retirement, a need to sell properties to buy annuities, which would die when the investor did, which could result in no inheritance for family members. The investor could only place a maximum of 50% of their fund into residential property and could not partake in connected party transactions. An earnings cap of £97,500 existed and percentage based funding calculations limited contributions to between £17,000-£40,000 per annum. I personally owned a SIPP, alongside a property portfolio acting as my alternative pension. The portfolio completely outperformed the SIPP due to all the limitations placed on this type of investment.

But come April 2006 this is all set to change. April 2006 is being labelled ‘A-Day’, the day when the rules will be re-written, but the rules are still a bit undecided. It would appear that investors will no longer have to amortise debt, they may never be required to sell their properties and may also be in a position to transfer funds free of inheritance tax. If all of these changes actually come to pass, buy-to-let investors will be safe in the knowledge that their children will inherit their pension funds completely tax-free. It is believed that connected party transactions will become acceptable, even the possibility of selling your home to your SIPP and renting it back to yourself is opened up. Earnings capping and associated calculations will be removed and the contribution limit will be increased to £215,000 per person, per annum. On transfer of any net fund values under £1.8m, there will be no income, capital gains or inheritance tax imposed. There will also be no requirement to purchase an annuity.

So how will this affect the property market? UK pension funds currently control £1,300bn in assets. That is more than the combined total of the pension funds in every other EU country. If only 10% of this extra cash is unleashed onto the UK property market in April 2006, I predict there will be a massive boom in property prices.

This may seem a brave statement to make, but come April 2006, SIPP’s are likely to become one of the most widely used tax-planning vehicles, allowing investors to reduce or mitigate inheritance, capital gains and income tax. Every accountant and IFA in the country could be suggesting SIPPs as the best way to invest for retirement. This will have a huge effect on the UK property market.

By the turn of the decade, I predict the UK rental market could grow from the current 10% of the housing stock to compete with countries like Germany and Switzerland, where rented housing accounts for between 60% and 80% of the housing market. Attitudes towards home ownership will change dramatically and quickly, giving buy-to-let investors huge potential for massive returns on investment for the very long-term while 50% maximum gearing within SIPPs will force property values up and up.

Investors are likely to be quick to realise the huge potential for returns in the buy-to-let residential market. From April 2006, it will be possible to beneﬁt from property market gains in a tax-privileged pension wrapper. Property will become a sure way for people to invest for their retirement and for their family. However, choosing to invest pensions in property will require individual guidance and advice to make maximum returns on investments and minimise the risks. Buy-to-let investment really is for the long-term and requires dedicated specialised consultation. Investors with a buy-to-let portfolio should really be seeking two types of advisor – one consultant to advise on pensions and another to provide guidance on minimising risk and gaining maximum returns from their buy-to-let portfolio.

2006 looks set to be the year that makes a real impact on personal ﬁnances and the buy-to-let property market. For advice on pensions speak to your accountant or an IFA. More information, hints and tips about buying-to-let can be found at www.themoneycentre.net.

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The rise and rise of property prices