News

Pension reforms could soon revive the buy-to-let market, but the wise landlord will tread with care - By Susan Emmett (Deputy Property Editor)

The Times (Bricks and Mortar) – 25 March 2005

The countdown has started. Sweeping changes scheduled to come into force next year will allow us to indulge our passion for property and tax breaks like never before. From April 6, 2006, investors will be able to buy homes, holiday bolt holes and buy-to-let with their pension funds. After that date property bought via a Self Invested Personal Pension Plan (Sipp) will not attract capital gains tax when it is sold, and income from rent will be tax free. 

Investors can already buy commercial property through Sipp, a type of personal pension where you can pick the underlying assets. But residential landlords are now preparing to cash in on the changes ahead.

Developers report a surge in the number of investors buying properties off plan that are scheduled for completion after April 6, 2006. Some landlords are even demanding special contracts to ensure that the developments are not ready before the crucial date. Investment advisers have also seen a rise in activity, with savers ploughing more money into pensions in readiness for what the industry is calling A-day. At the moment there are only 130,000 Sipps in existence. Experts predict that by 2010 the number will have risen to 500,000.

Many investors are taking our Sipps for the first time so that they can take advantage of the tax breaks that will boost their property-buying power.  Tax relief on pensions means that the Government pays £22 for every £78 that you invest, taking the total contribution to £100. Higher-rate tax payers receive a further £18. On top of this, you will be able to borrow 50 per cent of the value of your pension fund to buy property. Rental income will be free of tax.

Researchers at Savills estate agents calculate that the tax advantages of buying property through a Sipp would almost double landlords’ returns over a decade.  An ordinary buy-to-let investor who buys a flat for £150,000 with a 50 per cent mortgage could see a profit of about £70,000 after ten years, assuming prices rise at a rate of 4.5 per cent a year. The same property held through a Sipp would see returns of more than £140,000.

With such a tempting offer on the table, some financial experts predict that billions of pounds could be ploughed into residential property via Sipps over the next few years.  The cash injection could revive the buy-to-let market, which has lost some of its appeal as house prices have stagnated.

It all seems very neat. So what is the catch? For most investors, the greatest setback will be the size of their pension pot. There is a limit to the amount you can plough into your pension. At the moment your contribution ceiling depends on your age and salary. From A-day, the limits will rise. You will be able to invest the equivalent of your full annual salary or £215,000, whichever is lower.

But property is not cheap. The average house now costs about £160,000, according to the Halifax. That means investors must build up a pension worth about £100,000 before they can even consider buying property through a Sipp. Most pension pots are not that large.