Cyprus
is becoming a hot favourite with SIPPS investors – another funding
option for you? As I write this in November 2005, we are in one
‘regime’ with the expectation of a new regime beginning in April 2006.
This article is written from the current perspective but makes
reference, where relevant, to the new ‘regime’ which will be effective
from April 2006.
Cyprus as an investment is good news these days for capital
appreciation. Since joining the European Union in May 2004 the island
has opened up to investors and seen prices go up by 30% with high
demand for apartments in the Southern part of the island. There is a
company to help people to invest in Cyprus using either a UK SIPPS with
assistance from the UK government. Advice is required from a financial
advisor before this route is used. Use the services of a professional
organisation like Living Cyprus.com find them at
http://www.living-cyprus.com for free advice and property for sale in
Cyprus. Take a look and enjoy.
Andrew Walters is an acknowledged expert on pensions and in particular
can provide advice on the suitability of using a Self Invested Personal
Pension Plan (SIPP) to fund the purchase of a property in Cyprus.This
is an area that we have had a lot of interest in, but reliable advice
and information is hard to come by and so a talk with Andrew is
definitely to be recommended, if this is something that you have heard
about and would like to find out more.
For starters, if this is a type of transaction that you have not heard
of or had not previously considered, here is a brief guide provided to
us by Andrew on this topic.
We would like to stress that in providing this information, we are not
providing an opinion on this funding option nor should this guide be
considered as an alternative to independent financial advice which may
be sought in the UK via Andrew at EYFS Ltd or any other authorised firm
in the UK.
SIPPS – another funding option for you?
As I write this in November 2005, we are in one ‘regime’ with the
expectation of a new regime beginning in April 2006. This article is
written from the current perspective but makes reference, where
relevant, to the new ‘regime’ which will be effective from April 2006.
This article is based upon my understanding of current and proposed
legislation. It is not exhaustive nor should it be assumed that any
particular funding option is going to be suitable for you based only on
the reading of this article. No liability is accepted for any actual or
consequential loss arising from the use of this article as the basis of
making a financial commitment without also seeking independent
financial advice as an individual.
What is a SIPP?
A SIPP is a Personal Pension Plan with a self investment option. Which
means that in addition to the usual choice of insurance company funds
you may be offered via your personal pension plan you may also invest
in a wide range of assets of your own choosing such as : individual
shares or probably of more interest in this context – property.
Who can have one?
To some degree anyone who has pension monies in the UK, albeit if
future funding is a requirement the definition changes to anyone who is
eligible to take out a personal pension in the UK – which is just about
everybody who is resident in the UK!
What is often overlooked is that two or more individuals can, in the
right circumstances ‘team up’ to use their SIPP plans to buy a property
or other asset together.
This does of course have implications, but could in the right
circumstances increase your funding potential and enable you to spread
the inherent investment risk across a number of people.
Why haven’t I heard about them before?
SIPPs have been around for more than ten years but have traditionally
been the province of ‘serious’ investors or advisers managing large
funds on a discretionary basis.
They have previously had limited appeal to smaller investors as the
additional charges can tend to dilute any potential gains for smaller
investors provided by the increased investment horizon. This is not to
conclude that they are terribly expensive – just that the charging
structure is more complex. It’s a horse with a course!
The reason that most people will not have come across them is that
whilst previously, property purchase has always been possible via a
SIPP, it has always been limited to commercial property within strict
guidelines (and in the UK) – a property with any aspect of
residentiality was specifically excluded.
Another tricky limitation was the exclusion of any purchases from
yourself, anyone in your family or a ‘connected 3rd party’ – this was
always a bind because most of the best investment opportunities that
arose in my experience fell into this category!
The Government intends, according to its indications, to lift these
significant barriers from April 2006 and from then on residential
properties for occupation or let in the UK or abroad will be potential
investments for a SIPP and the rules on purchases from connected
persons is to be relaxed - hence the considerable interest!
How do they work?
Usually a SIPP is established on a deferred basis as an ‘add on’ to a
personal pension plan – that is the personal pension plan is
established with a view to self investment in the near or more distant
future – and as such starts out like any other personal pension plan.
[Stakeholder pensions have not embraced SIPP functions and so if your
pension fund is currently in one of these plans and you wish to self
invest, a transfer may be necessary. This should not be contemplated
without taking independent financial advice.]
Self investment via a SIPP is made through a trustee (usually an employee of the insurance company or a scheme administrator).
In brief, you complete a form detailing the proposed investment and the
trustee has to approve it. Normally, when buying authorised unit
trusts, investment trusts or securities this just amounts to a rubber
stamping procedure.
However, when something more ‘individual’ is proposed – like a property
– the trustee needs to satisfy himself that the proposed investment is
allowable (within Inland Revenue rules) is permissible (within the
scheme rules) and is suitable (satisfies the basic needs of an
investment). In practice, this is usually quite straightforward since
it only makes sense to propose investments that work at all of these
levels.
Once the trustee is satisfied then the investment/purchase may proceed
subject to all of the usual hurdles such as a valuation, conveyance of
legal title, stamp duty etc.
If a scheme is already established, then a property transaction through
a SIPP should not take significantly longer to complete. Where there is
no SIPP established or the transaction is reliant on funds being
transferred in from other schemes it is likely that the transaction may
be significantly protracted and you would be well advised not to
promise your vendor any completion dates that are too optimistic.
If the purchase is being made completely from existing funds the
trustee will ensure that payment is made under your guidance. If the
scheme needs to borrow money to fund part of the purchase – which it
may do – then the trustee will need to apply for funds, this can
usually be from a lender of your choosing. The point to note is that it
is the SIPP that is borrowing the money and not you – so the
transaction must satisfy the lenders criteria in its own right.
SIPPs can currently borrow up to 3 times the scheme assets. For
example, if the scheme has £100 000 in assets it may borrow (subject to
approval) potentially another £300 000, which means that you could go
shopping with £400 000!
Unfortunately, under current rules you cannot buy residential property
and by April 2006 (when you can) the scheme borrowing facility is to be
capped at a more realistic 50% of scheme assets. In the same scenario
as above this would reduce your shopping capacity to £150 000.
Once completed the property becomes a scheme asset administered by the
trustee. It is very important that you understand the implication of
this. The property is not yours – it belongs to the scheme. It can be
sold but the proceeds return to the scheme for re-investment. You
cannot sell the property and personally pocket any of the proceeds.
With all significant financial commitments you are well advised to take
independent financial advice prior to commitment funds and this is
definitely the case with this type of transaction.
Advantages…
In the UK, these schemes are fantastically tax efficient.
Tax relief on new contributions to eligible investors at at least the
basic rate and at their highest UK rate of tax if this 40%.
Virtually tax free growth on investments whilst within the scheme.
No capital gains tax upon disposal of assets and rents on leases / lets are paid into the plan tax free.
Any interest on scheme borrowings will usually be relieved too.
Normally no inheritance tax is payable on scheme assets either
But, perhaps the biggest advantage is that it introduces a source of
funds – your existing pension plans - to potentially enable you to buy
your property (from April 2006) which have not previously been
available to you.
What’s more, new substantially increased contribution limits mean that
money can be accumulated faster in schemes than at present.
…and Disadvantages?
The property is not your asset – it cannot therefore be considered as
collateral for any other borrowings, nor can you sell it and ‘pocket’
the proceeds.
Future capital gains and rental income will be potentially taxable in
Cyprus (but not the UK) exposure will vary depending on how you choose
to hold the property and the figures involved. IHT doesn’t exist in
Cyprus though fortunately. It is not therefore likely to be the most
tax efficient investment that you could hold in a UK pension – but
still could be worthwhile.
Your choice of property may prove to be a poor investment as a result
of any of the following: low capital growth or even a slump in property
values, Poor rental income
If you stay in the property or reside in the property you will be
expected to pay the going rate – but at least you are paying it back to
your own pension!
At some point, unless any property subsequently becomes a relatively
insignificant part of your pension fund, you will have to sell the
property to derive an income – as this is, it should be remembered, the
primary purpose of any pension plan! It may not, therefore, be
advisable that you purchase a property late in life that you intend to
live in until your death via a SIPP.
How do I find out More?
Any IFA in the UK should know what a SIPP is, but few will know the
intricacies of the plan and in particular how it can be suitably
harnessed for the potential purchase of a property abroad. Using my
links in Cyprus, I am making it my business to put together robust and
reliable means to make this possible via developers and lawyers and so
I believe that I may be well worthy of consideration for assisting you
with this type of transaction back in the UK.
