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How you can take advantage

The Sunday Times Money section 9th January 2005

Experts say the new pension rules will boost profits for property investors.  We show you how to take advantage.

WHAT PROPERTY WILL I BE ABLE TO BUY WITH MY PENSION FUND?

The government will allow your main residence, holiday home or buy-to-let to be held within a pension fund from April 2006.

However, you cannot simply transfer an existing property into your fund; the scheme will have have to buy it.  If you sell holiday home or a buy-to-let to your scheme, you will have to pay capital-gains tax on any profits.

Savers are unlikely to sell their main residence to their pension because they would have too pay rent to the scheme.  But the advantage is that they would release cash from their fund.  Your pension will have to pay stamp duty on any property purchases.

HOW WOULD IT WORK?

Suppose you wanted to buy a £150,000 property with your pension. You could make contribution costing £60,000 which would be boosted to £100,000 by higher-rate tax relief. The pension could then borrow 50% under the government's rules - half of the value of your fund. In reality, contributions are limited to a proportion of your earnings, although this restriction will be lifted next year, from April 2006, you will be able to contribute your entire earnings, up to a maximum of £215,000 a year and a lifetime limit of 1.5m.

Once the property is within the fund, any surplus rental income after mortgage interest is free from 40% tax.  Any proits when you sell will also be free from tax.

Suppose the value of your property grows by 4.5% a year and is worth £232,945 after 10 years.  You sell the property and profit - £82,945 - is free from capital -gains tax.  Outside a pension, the gain would be subject to tax at 18%.

Your profit would be £140,000, according to Savills, a property firm, compared with £75,000 outside the pension.

DO I HAVE TO SELL WHEN I RETIRE?

No, but you may want to if you need your fund to produce an income.  The Income would be subject to tax.  If you do not need to sell the property for income and you hold it within a so-called ''family sipp'', the property could pass to other members of the pension when you die - including your heirs.  This will apply even after the age of 75 because the government will no longer require you to buy an annuity, subject to some restrictions.  At present, the transfer to your heirs would be free from inheritance tax.  But Labour is expected to clamp down on this perk.

CAN I START MAKING CONTRIBUTIONS NOW?

Expert suggest you start contributing as soon as possible to build up a big enough fund.  Suppose you are 40 years old, earning £55,000 and you have a personal pension of £50,000.  You could pay £11,000 into your pension this year and next.  If you made no payments in 2003-2004, you could use the ''Carry Back'' regime to make a further contribution of £11,000 now as though it had been made last year.  In April 2006, you could make final contribution of £17,000.  Your fund would be worth £100,000, anabling you to borrow anhother £50,000 - enough for the average property. 

Visit lifetimelimit.co.uk for more details.