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Sipp edge: John Heron

We can expect the tax efficiency of a Sipp to motivate a number of new entrants in the buy-to-let market, people who previously held back from the market.

Paragon recently teamed up with James Hay, one of the leading providers of self-invested personal pensions to develop a range of products aimed at individuals who want to take advantage of the changes to Sipp rules from April 6, 2006.

From the beginning of the next tax year, residential property will become a qualifying asset for Sipps. This means that people who prefer to put their money in bricks and mortar will be able to save for their retirement via a tax-efficient investment in residential property, which was excluded under the original Sipp rules introduced in 1990.

This significant change, which is expected to be accompanied by an inc-rease in the annual funding cap, will make Sipps an attractive investment for a rather wider cross-section of investors, including many of our existing buy-to-let customers.

In a recent survey, over half of our landlords said they definitely plan to take advantage of this opportunity or would consider doing so. It is fair to say that among our clients, there is already a strong groundswell of interest.

In particular, existing buy-to-let investors will likely to be motivated to add to their holdings by placing their next property acquisition in a Sipp vehicle.

They would ringfence an element of their BTL portfolio and maintain this within their Sipp, independently from their remaining (taxable) portfolio.

We can also expect the tax efficiency of a Sipp arrangement to motivate a number of new entrants in the buy-to-let market, people who previously held back from the market for a variety of reasons. Cumulatively these may represent a significant boost for the market at a time when activity in the residential sector has been a little subdued.

For Paragon, it is vital for us to develop a range of Sipp-to-let products tailored to the needs of existing and future residential property investors after April 2006. James Hay, as the leader in its field, was our ideal choice of partner.

Paragon Mortages and Mortgage Trust will work with James Hay to research, develop and then deliver a range of products and services to buy-to-let borrowers looking to take advantage of the Sipp rule changes.

Fundamentally, these will range from a straightforward Sipp lending facility for investors wanting to buy a property to let via a Sipp trust vehicle through to the provision of full management services for the Sipp vehicle itself, including reporting to the Inland Revenue.

However, some questions remain unanswered. The Inland Revenue is unlikely to publish detailed guidance on the rule changes until the autumn. It is not clear whether or not the borrower’s own residence can be included, along with holiday property owned either at home or abroad.

It is believed that the vehicle will be permitted to borrow up to 50 per cent of the value of the fund to buy and develop property, although it is not known whether this borrowing limit applies to the value of the fund or the value of the security.

What we do know is that from April 2006 residential property can be held in a pension scheme free of income and capital gains tax and that other changes in pension rules, such as the increase in the annual funding cap, are likely to make this even more attractive.

As far as intermediaries and lenders are concerned, it is still early days and those with less of a focus on buy to let will not be fully up to speed at this stage while most landlords are only just starting to focus on the opportunities presented by the change.

In our survey, a quarter of landlords were not aware that they would be able to put buy-to-let investments into a Sipp from next April.

For our part, we are committed to providing as much information as we can to brokers, the media and the industry.

Once detailed guidance has been issued and the rules are clarified, we anticipate publishing clear product guides for intermediaries to help them in advising their clients.

All in all, we believe that the ability to place residential property within a Sipp wrapper will be welcomed by many individuals as they plan for their retirement. By combining expertise, James Hay and Paragon, we will be ideally placed to play a leading role in helping our current and future customers maximise the benefit of this important opportunity.

John Heron is managing director of Paragon Mortgages


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