Removal of tax breaks on direct investment in residential property and esoteric assets in Sipps has provoked a flood of comments from IFAs concerned about the effect on business and consumer confidence.
Many comments on the announcement in the Pre-Budget Report, (see previous IFAonline story - Pre-Budget: Tax breaks removed on sipp-led investments), express disbelief at the last minute u-turn by the government and what it means to them with regards to the issue of buy-to-let as well as loss of time, money and development.
Graham Worrall, from Cyberifa, says it was the government who came up with the idea to include residential property in sipps so officials should take the responsibility for the costs incurred by providers, advisers and clients when changing their mind at such a late stage.
“’Removal’ of residential property facility in Sipps; while it was never there - it would have been in April 2006. The industry did not ask for it. The government included it in their 'pensions simplification' measures completely out of the blue and said very clearly they were going to make it possible for a sipp to invest in residential property.
“By in saying that it WILL happen the government is responsible for all of the planning which providers, advisers and clients have made in response to the government's stated policy. Changing that stated policy in this way at this late hour means- to all those who have needed to plan to take account of stated government policy changes - that they have lost hours, days, weeks, months of work and planning, and millions of pounds in development costs.
“Gordon Brown's job is to look after this country's money. This country's money is generated by its citizens as individuals as employees and as shareholders. This move by Brown is an irresponsible act of vandalism to all concerned parties. His careless actions show his lack of attention to matters which are very important to the electorate and his cavalier attitude to the mess he has created through his sudden and unexplained change of mind.
“I do not care whether a SIPP can invest in residential property or not. What I strongly object to is being told in no uncertain terms that it will be able to, planning around that supposed inevitability for clients, spending my time responding to clients' requirements associated with the new facility for their pension funds and then, with no apology from Brown at all, finding in the small print of his pre budget that he had sneaked in a removal of the change which he had assured us would take place.
“He has personally cost me a great deal of money, wasted my time, wasted my clients' time, wasted Personal Pension providers' time and development money, wasted lenders' time and money, wasted Property management firms' time and money and shown an absence of any consideration in doing so. At the same time Gordon Brown tells us on Radio4 this morning that Britain's Financial Services lead the world - no thanks to him then.”
Meanwhile, Paul King, from Client Bank, questions the vagueness of the technical note and the lack of clarity regarding the inclusion of buy-to-let properties.
“This looks like the ‘gift with reservation’ rules which apply to IHT. Could it be argued then that residential property purchased not for personal enjoyment, but for sound business reasons and purely as a tradable, transferable asset should still be allowed post A-Day? Given this line of thought, a 'residential' property is then just like a commercial property, the only difference being that individuals are paying the rent and not a business.
“My reading of the technical briefing indicates that this is a political decision more linked to stopping a swathe of second/holiday homes than preventing the spread of property for rent. Indeed, Brown talked about the need for more property for rent and about increased house building and equity share schemes in the very same part of his speech - which gives us some context?
“Would it be a good idea for someone to ask for clarification on this sooner rather than later?”
Keith Slater, from Ashdale Investments is also hopeful residential property which is not for the use of the sipp holder or his/her family and friends may still be allowable.
“We can all only hope that the sledge-hammer approach Brown has employed is watered down when the final legislation is published. After all, there has always been a strict requirement that directors could not employ personal benefit in a ssas, so why should there be any necessity to tighten rules elsewhere? Approval and subsequent tax relief has always depended on IR rules and interpretation of the use of investments, hasn't it? Or have I been asleep for the past few years?”
Barry Painter from King IFA, also believes buy-to-let investments are still possible as they could be considered a “commercial vehicle”.
“It is not true to say all residential property will be stopped, our understanding is that the measures are to stop self-use, in which case buy-to-let should still be allowed.
“Our understanding is that if it is not a commercial transaction, then the property will be taxed with the benefit in kind rules, and as buy-to-let are not for families, or personal use, they are fully commercial and should still be allowed.
In the pensions simplification technical note, the government says it is “minded to allow self-directed pension schemes to invest in genuinely diverse commercial vehicles that hold residential property or other prohibited assets”, and we see buy-to-let as being a commercial vehicle.
“When the definition of ‘residential property’ is made, we would expect buy-to-let to be included as these real estate investment trusts (Reits) are not going to be the whole answer.”
Meanwhile, not everyone sees the move as a bad thing, as Graham Bowser, from QS Independent Investment & Pension Consultants, says in reality most pensions holders could or would not be able to make residential property a profitable part of their retirement fund.
“The First Sensible Thing This Government Has Ever Done!
“Individual residential properties are a high risk investment with very high expense ratios and a very high chance of income voids, not to forget maintenance and repair costs.
“Whilst certain life offices may have seen the mass sale of "sipp-enabled ppps" as a saviour - in a market where their influence is shrinking - the reality is the vast majority of pension holders do not have the available existing pension funds (or the ability to make sufficient additional funding) to make direct residential property a valid part of their retirement portfolio.
“Now, for the wealthy, the potential to fund a child's university accommodation, or a holiday home, via a pension fund was indeed a very attractive proposition but these examples clearly show that the Government was naive to have included this proposition in the first place.”
That said, not everyone was surprised by the announcement, as IFA Ted Millichap says he has been predicting the move for some time on the basis of tax issues.
“Whilst the Chancellor has said that the move to ban residential property is designed to prevent fraud, I have been predicting this move for some time, simply because the Inland Revenue cannot afford to lose that much Schedule A tax.
“Schedule A is the income tax levied on income earned from real estate. Unlike most other forms of income tax, gains and losses on Schedule A cannot be offset against any other gains or losses under other schedules. By far the largest values are in Schedule A gains, and there are minimal amounts of losses.
“It is my belief that HMRC have always been against the inclusion of residential property in tax shelters such as pensions for this very reason, but couldn't come up with an argument against the Pensions Simplification regulations imposed on them by the Chancellor's office, until now.
“The argument of preventing fraudulent use does not stand up to examination when you place it against the purchase of premises by SSASs for the use of the parent company.
“An inspection system exists to ensure that the parent company pays a legitimate rent for use of the property, and the same system could be used for residential property, simply by requiring SIPPs to have a pensioner trustee in the same way that SSASs do. The trustees could then be provided by the life offices, for a fee, as a part of their SIPP offering.”
Jason Feavers from P J Clifton Financial Services believes the chancellor has made a big mistake in announcing a move which would not only cause inconvenience to the industry and public, but also loses the Treasury significant tax windfalls.
“I feel Gordon Brown has certainly scored an own goal with this U-turn.
“Whilst most industry commentators are quite rightly talking about the cost and inconvenience of such an announcement so close to A-Day, I believe that the demand for residential properties in pensions has been greatly overstated and abuse could be taken care of by a punitive tax on personal use (which I understand was included in the original proposals anyway).
“If large numbers of buy –to-let investors were to transfer their existing properties into sipps, this would actually create quite a windfall in capital gains tax for the Treasury, as any investment property currently owned by an individual would have to be transferred from the individuals name (creating a potential CGT liability) and purchased by the pension fund. I would have thought that such a windfall would be welcomed given the current state of the government’s finances.”
For Stephen Bourne at Donnellsons, the measure has triggered disbelief at the timing of the announcement and the possible damage it has caused to consumer confidence in pensions.
“I have just read your article on the measures introduced in the PBR statement and have the same sense of disbelief as your report attributes to John Lawson.
“The Treasury formulated these plans at a time when real property was the investment of choice for thousands of investors many of whom did not possess a pension scheme. Gordon Brown and the Treasury must have been able to anticipate not just the level of interest such a move would excite among investors, but also that those in the industry from providers to advisers and trainers would invest significant resources to address that demand potential.
“To now introduce such penal measures and to characterise buying residential property in a sipp as an ABUSE of the rules, framed by this government after lengthy consultation, is an outrage worthy of impeachment. Gordon Brown has at a stroke caused millions of man hours and pounds to be simply wasted. We have all been duped!
“The worst thing of all though is the damage that Gordon Brown has done once again to the British public's most basic requirement for future planning - CONFIDENCE in the system.
“Will he allow investors who have opened plans just to invest in residential property to close them and take their funds back - I doubt it?
“Will he allow those investors who added additional cash to their pension to buy residential property to now take that money back - I doubt it?
“Will he compensate those investors who have switched to cash to ensure they had sufficient funds to buy residential property and so missed the recent bull run - I doubt it?
“Will he repay all the industries product development and training costs - I doubt it?
“Against this background and the earlier cancellation of the right to reclaim the dividend tax credit, can any of us have sufficient confidence that the remaining tax reliefs for pensions will continue, to add more money to pensions and accept the restrictions imposed on access to those funds - your call Mr Brown.”
Finally, Tony Martin, from The Haven Partnership, says the announcement shouldn’t come as a surprise considering the government’s past behaviour, and people should learn from their mistakes.
“Why am I not surprised by this government's attitude. It tackles all the soft options like the ‘Lords’ and ‘foxhunting’. It even has a go at savings by abolishing Peps in favour of Isas - why and at what cost?
“It crucifies pensions by raiding the funds with a tax take of £4-9bn a year (depends on who you read) and messes up stakeholder with an unworkable 1% charges cap (since raised to 1.5% on threat of all life companies taking their head offices abroad).
“Why believe anything they say? Even the Turner report has been trashed by the real Golden Balls himself (Gordon) because it embarrasses his favoured "tax credits" system. He wants to control us all with this madness.
“So, all those idiots who converted to cash pension funds ready to pounce on that nice little flat in Hastings (or that other desirable area, Glasgow), should be feeling a bit of a fool. The past performance of this current regime did not warrant such trust. Hey, live and learn.”
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7968 4558 or email [email protected]IFAonline
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