Pension holders look at property for yield
With interest rates at an all-time low, investors everywhere are continuously looking for better opportunities which will earn them a decent return.
Rental yields are strong in Ireland so it's not hard to see why investors are keen on property. This applies to all kinds of investors, including pension investors, who have the added investment incentive that any income or capital earned in the pension is free from income and capital gains tax (CGT).
Many potential property investors have funds available either through their pension or through their company. There are three primary ways of doing this: The cash could be extracted from the company by a shareholder who then buys the property, it could be purchased by the company, or it could be purchased through a self-administered pension.
The self-administered pension can be the most efficient route for an investment of this type.
Extracting funds directly from the company would give rise to significant tax liabilities, and if the property is bought through a company, corporation tax will fall due on rent received. In addition, it could potentially give rise to corporation tax on chargeable gains if the property is sold.
Moreover, when sales proceeds are extracted from the company then the investor may still be liable for income tax or CGT. Furthermore, purchasing an investment property through a company can adversely impact on the availability of CGT retirement reliefs and CAT business property reliefs.
The concept of using pensions to invest in commercial property is growing in popularity - particularly following strong pension growth over the past five years.
It is estimated that there are 7,000 to 8,000 Small Self-Administered Pension Arrangements (SSAPs) in existence and about half of these were established to allow the pension holder to invest in property. In response, Independent Trustee Company launched PensionProperty.ie to assist people in understanding the process of buying property through pensions, and believe that up to 1,000 new SSAP funds will be established in 2016 to facilitate property deals.
The flexibility of a self-administered pension arrangement means that, provided pension rules are satisfied, the pension investor can choose the property they wish to purchase. Financial efficiency appears to be driving this trend - all income and gains within pension schemes remain exempt from income and capital gains tax.
On retirement a quarter of the fund can be taken tax-free by the investor, with the first €200,000 tax free and the balance from €200,000 to €500,000 taxed at 20pc. The property can be transferred in specie to an Approved Retirement Fund (ARF) and continue to generate post-retirement income.
Property purchases are typically facilitated through a unit trust structure and a specific sub-fund is established to hold each property. As a result, when borrowing to purchase a
property, the other assets of the pension scheme are protected as the banks only recourse is to the assets of the sub-fund and not the pension itself.
The Revenue Commissioners have introduced some criteria that specifically apply to property investment. One of the primary preclusions is that the vendor must be at arm's length from the scheme and the employer including its directors and associated companies.
The pension scheme itself must have enough liquid investments to meet its liabilities.
Barry Kennelly of pensionproperty.ie, a subsidiary of ITC, is a qualified solicitor and a registered Trust and Estate practitioner (TEP).