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A push up the ladder

First-time buyers Charcol senior technical manager, mortgages, Ray Boulger says a parent’s Sipp investment could help their children move into their first home

Few new concepts in the property market have attracted more attention than the much anticipated ability to place property in a self-invested personal pension from April 6 next year.

Although most people will find that the downside of putting overseas prop- erty in a Sipp will outweigh the benefits – and, in any case, few Sipp administra- tors are likely to offer this facility – there will nevertheless be some interesting ways in which people can use their Sipps to invest in residential property.

It will be crucial for advisers and investors to investigate any options in detail before jumping in.

One idea I think could be attractive is to use the new rules to help first-time buyers. With even average house prices well above what many first-time buyers can afford, there is a clear need to explore innovative methods of achieving home ownership.

The new rules will make it possible for a parent to invest in a property via a Sipp as a co-owner with their adult child. The parent will get a good tax-efficient invest- ment while their child will get a home they can afford.

The average amount invested in a Sipp is currently only about 40,000, so most people will not have enough to buy a property. But an option open to many parents could be for their Sipp to buy an equity share in their child’s first property, as this would require a much smaller investment.

This would work on a similar basis to a shared-ownership scheme except that, instead of a housing association or the Government providing the funds for the equity share, the Sipp would fund it.

The scheme I am propo- sing makes the purchase affordable because it effectively costs the parent nothing if they already have the funds in their Sipp. The child lives in the property rent-free while paying the mortgage on their share and maintain- ing the property. In lieu of rent, the Sipp is entitled to a bigger proportion of any capital gain when the property is sold or the child buys out the equity share. The amount of this split would be agreed between both parties from the start.

Alternatively, a notional rent of not more than 3 per cent would be charged by the Sipp but deferred until the property was sold.

Which of these options is more suitable depends on the risk profile of the parent and their child. The first strategy is higher risk for the parent and, as such, more suitable for those who are bullish on residential property prices in the long term. Charging a notional rent is safer as, even if the property value falls, the rent accruing each year will probably still produce a profit.

The examples (left and right) illustrate the prin- ciples involved. Whichever method is adopted, HM Revenue & Customs will need to be satisfied that the Sipp investment is made on commercial terms. However, as the Government has stipulated that it expects the average rent charged by lenders which participate in the Homebuy scheme to be less than 3 per cent, it is difficult to see how HMRC could argue that 2.5 per cent is not a commercial rent.

Even if the parent does not have sufficient funds in their Sipp or does not even have a Sipp, this scheme could still be an attractive option for helping their child to buy their first property. Indeed, there is no reason why it could not be used to help finance subsequent purchases.

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