Buying investment property into a pension
Investing in property through your pension offers a number of key advantages over holding it directly, with the result that your long term returns will be significantly enhanced.
Tax relief is available not only on monies contributed to a pension but also on any rental income received on assets such as property held within a pension structure. Also any capital gain made on the disposal of assets including property held in a pension is likewise exempt from tax.
Here are some commonly asked questions regarding holding investment property in a pension:
What are the advantages of owning a property through a pension?
The main advantage of saving through a pension is that you receive full tax relief on money you contribute. In practical terms, this effectively doubles your money on day one. However there are further advantages when you compare owning property within a pension or owning it directly:
Why are people buying property into their pensions?
Most investors buying property into a pension are interested in owning a tangible real asset capable of producing a steady income over time. Bank deposits are currently paying close to zero interest and not all investors favour market-based investments, making property an attractive alternative. Others may favour having property in their pension portfolio as a diversifier.
What type of property can I buy?
Both residential and commercial properties are allowable. There is very little restriction on what you can buy, so long as the property is for investment purposes and is held at arm's length. This arm's length restriction means the property must be held as an investment, you will need to appoint a property manager and the property can not be used personally or by people or businesses connected to you.
Can I borrow money to buy property in my pension?
Yes. However the majority of pension investors purchasing investment property do not borrow. Borrowing is restricted to 50% of the property value and funding is available through a limited range of institutions.
We are currently advising clients to avoid borrowing against property purchase in their pension, save for where the schemes are of considerable size, on account of proposed changes to pension rules which may have a bearing on the cost of certain pension structures used in the instance where a scheme wishes to borrow.
Can I buy property into my existing pension scheme?
Most likely not. Most conventional pension structures will not allow you to purchase assets outside of the range of funds offered by the company with whom the pension is held. In order to purchase property you will need a self directed insured structure or alternatively a self administered structure. In most instances, we can facilitate clients restructuring their existing pension arrangements to facilitate property purchase.
If I change structure, can I keep my existing investments?
For the most part, yes. It may be possible to transfer your existing investments to your new scheme or to replicate them. Alternatively, on occasion it may be preferable to operate more then one pension scheme.
Should a property be the only asset in my portfolio?
It can be, but we would strongly recommend that a property forms part of a more broadly diversified portfolio. We can advise you broadly on your financial planning or alternatively just put in place a scheme to receive funds either directly or from an existing pension and facilitate the property purchase.
How much will it cost?
Typically a pension structure holding property will cost between 1% and 1.5% of the scheme's value to maintain. This fee is made up of varying costs including administration, regulatory costs, accounting, advice and custodianship. You can also expect to pay a set-up fee of between 1% and 3% of the scheme value. These fees, as well as any other costs associated with the property can be billed back to the scheme. Other costs may include service charges, management fees, repairs and maintenance or refurbishment costs, again all costs and charges directly connected to your investment are billed back to the scheme and not met out of pocket.
How much do I need to have in my pension to make this a realistic proposition?
Generally larger schemes benefit from some efficiency in scale however, in our experience you will simply need a minimum of the purchase value of the property plus costs and a small surplus for liquidity purposes to invest in property through your pension. Currently, the the minimum property value where borrowings are involved is €80,000. We've seen properties ranging from €40,000 to €2,000,000 purchased by pension investors.
At SMP Financial, we have considerable experience in advising clients in setting up pension structures through which to invest in property.
To discuss purchasing a property with your pension please enquire through the form below or email firstname.lastname@example.org
Property held directly
Capital gains tax payable at 33% on gains upon sale
Income tax payable at marginal rate on rents
Property in a Pension
No tax payable on capital gains
No tax payable on rental income