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Putting down new routes

There is no right and wrong way to buy a property but you must involve all your professional advisers in the debate.

The route that offers the greatest freedom and flexibility – that of owning it yourself – unfortunately brings with it the most tax disadvantages. You will have to finance the property out of net income and pay taxes on rental receipts and future capital gains.

In the past, businesses built up their assets by buying property. The fallacy of this was realised when companies failed as most business buyers are not interested in the capital assets.

The company will fund the property out of post-tax profits and pay gains tax on realisation.

The most tax-efficient way of purchasing a property is via a pension scheme but you have to be aware that it is also without doubt the most restrictive route. Utilising the pension scheme, you use pre-tax profits as contributions. Under current legislation, all rent received and capital gains are tax-free.

While the pension scheme has the freedom and ability to sell on the property, the proceeds must remain in the scheme as an asset to provide pension benefits.

Due to your long service and high salary, the rules concerning contributions would allow significantly more money to be paid into an occupational self-administered scheme than a self-invested personal pension. For personal pensions, it is a straight percentage of your salary relative to your age.

There is a third route that we have to consider that falls under the new pension simplification laws. On the basis that regulations do not change the basis of the law, contributions of up to £200,000 a year will be payable from April 6, 2006, regardless of service and salary.

Unfortunately, borrowing will still be required. Each of the above three routes have different restrictions on the amount of money that can be borrowed by the pension fund. You also need to be aware that, from April 2006, they will all be replaced by the third version.

The amount of money that can be borrowed under an SSAS is relative to the value of the fund and contributions. While the SSAS route offers the opportunity for the highest contributions, unfortunately, you are restricted with regards to borrowing. The Sipp route, while offering the lowest level of contributions, offers the highest level of borrowing, being up to three times the value of the fund.

Both will be replaced in 2006 by the simpler route of the new-style pension scheme, which is only able to borrow half the value of the fund.

If you are prepared to wait, the new legislation might offer the best way forward, enabling you to fund significant contributions over two or three years and allowing you to purchase the property out of gross profit via your pension fund.

I understand, however, that the situation is that you expect exceptional profits in this current and the next financial year, so it is important that we move ahead as soon as possible. There is, thankfully, a further route which combines both the SSAS and the Sipp. We could set up an occupational scheme, make maximum contributions in this and the next financial year and then transfer all this into a self-invested personal pension, subject to Inland Revenue limits for such transfers.

Then a purchase price of four times the total amount transferred into the Sipp would be allowed. For this to work, the whole transaction, particularly the borrowing, must be completed before the April 6, 2006.


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