Self-administered pension holders set to capitalise on property upswing
THE majority of people in Ireland believe that now is the time to buy property, according to two recently published reports.
A global study conducted by Ipsos found that Ireland was one of just four countries of the 26 surveyed where respondents thought that this was a good time to buy property.
Research from the ESRI which revealed that 66pc of people believe it is a good time to buy supported this contention.
But is there an investment case to support this sentiment? CSO data revealed that in the year to April property prices increased by 8.5pc.
Residential prices in Dublin are 48.5pc lower than their highest level in early 2007. And in the rest of the country, residential prices are barely half their highest level in 2007.
So while prices have balanced out, the next question for investors is return on investment – i.e. rents.
According to the latest quarterly rental report from Daft.ie, the average rent nationwide is 9pc higher than at the same stage last year.
The average rent nationwide is now €888, up €69 from the trough in 2011.
Rents rose in all city centres, with Cork and Galway cities experiencing a 6pc rise, Limerick a 5pc surge and Waterford 1pc. Rents in Wicklow and Kildare saw an increase of 9pc.
Things appear to be adding up in favour of the argument to invest in property. But one last question remains – how to fund your investment?
Those with self-administered pension schemes may have the upper hand, though they may not even know it.
Acquiring property through individual self-administered pension schemes is one of the key benefits of these pension schemes. Provided rules are met, the member can use their knowledge to access such unique opportunities.
Many pension investors have funds available either in their pension or in their company that could be contributed to their pension scheme.
With deposit interest rates currently being so low, the returns that these funds are generating are minimal. Contrast this with the strong rental rates in Ireland and it is not hard to see the attraction.
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. Both residential and commercial property can be acquired.
Wherever a property is acquired through a pension vehicle, the rental income is not subject to income tax, nor will capital gains tax be payable on the sale of the property.
Borrowing can be utilised if available and the property fund can even be registered for VAT if required.
On retirement, the property can be transferred in specie to an Approved Retirement Fund (ARF) and can continue to generate a post-retirement income. Indeed, the value in the property ultimately forms part of the ARF holder's estate on death, which means that the value in the property (as opposed to the property) can be passed on to the ARF holder's family.
If an investor wishes to purchase property outside Ireland and the UK, this can be less tax efficient, as there is no automatic tax exemption for income received in pensions for any foreign country other than the UK, though some tax experts can structure the investment to address the tax aspect.
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 bank's only recourse is to the assets of the sub-fund and not the pension itself.
Furthermore, where VAT arises on a purchase, the sub-fund itself can be registered for VAT without having to register the entire pension fund for VAT.
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 also have sufficient liquid investments to meet its liabilities.
The acquisition of property through a pension is just one of the benefits that attract investors and savers alike to self-administered schemes. Other benefits include the fact that income tax relief on employee contributions remain at the higher rate of tax; that the employer can get full tax relief on qualifying contributions; all income and gains within pension schemes remain exempt from income tax and capital gains tax; on retirement, an individual may take 25pc of the value of the pension fund as a lump sum, of which €200,000 is tax- free; the individual has control over every aspect of their pension affairs including all investment and contribution decisions; and the individual has access to a broad range of investment types in a transparent, flexible, secure, cost efficient environment.
Sean McLoughlin is Head of Advisor Services for Independent Trustee Company
Sunday Indo Business