Assetz® News - Overseas tax rules may inhibit SIPP investment but solutions exist

Overseas tax rules may inhibit SIPP investment but solutions exist

22nd August 2005 |

Savers hoping to translate their pension pot into a foreign holiday home under next April's 'A-day' pension changes have been warned that it may not be as simple as they had originally thought.

The imminent Self Invested Personal Pension (SIPP) changes will allow savers to invest their wealth in property through their pension fund, with income earned from the property added to the pension plan and allowed to grow tax free.

There will be no income tax payable on the rent, and unsurprisingly personal finance advisers report that they are being "inundated" with inquiries from savers wishing to buy property abroad through their pension plans.

"We estimate that around a third of our existing clients will want to do this but that doesn't take into account the number of people who will start up a SIPP specifically to buy foreign property," David Baker of James Hay Trustees, the biggest administrator of SIPPs in the market, told the Telegraph.

Mr Baker also believes that a large amount of the demand for SIPP's plans will be from people who already own overseas property and want to know how to transfer this into a pension fund, and some estimate that the current 100,000 SIPPs holders could treble after next April.

But most SIPP providers, wary of overseas tax rules and regulations, have so far not been so keen to cater to public demand. While 30 of the 40 largest providers have opened their plans to UK property transactions, only one has made a commitment to dealing with overseas property and that is the Assetz SIPP personal pension.

Detailed regulations on how pension funds would in practice purchase overseas property have yet to be published, and are not expected until September this year. But already a number of potential difficulties have come to light.

The most significant stumbling block is that while property may be exempt from UK taxation, they may still be liable for full range of taxes overseas, such as income, capital gains and inheritance taxes.

"As SIPP administrators we are having to investigate the tax and legal situation on a country-by-country basis - they all have different tax regimes," said Nigel Bunting of SIPP provider Suffolk Life.

"Hopefully, we will have something up and running by next April, but at the moment it is far too early to say in which countries we will accept property investments."

Other providers have pointed out that the properties will essentially be owned by the pension fund – essentially the same as a trust fund but unrecognised through much of Europe. A few countries with similar tax compliance schemes - such as Cyprus – could be major beneficiaries of the change.

A further issue, say providers, is that those who already own overseas property abroad are likely to be taxed on capital gains, as they essentially sell their property and buy it back through the pension fund.

Stuart Law, Managing Director of Assetz said "most traditional pension companies are very slow off the marks in releasing a property friendly SIPP, we have now launched the Assetz SIPP and it will allow anything that is legal under the new rules including UK residential, overseas property invstments and holiday homes and even fine wine or art. It is low cost relative to other flexible offerings and I would urge clients that want to invest in property to review our SIPP immediately and get their house in order before the mad rush in 2006."