Residential property has been a boon for property investors over the last decade, with returns easily exceeding those for the stockmarket. One of the problems with property investment has always been that the profits and capital gains on second homes are taxed. This is about to change. A sweeping range of pension reforms will take effect in the UK from April next year. The most significant change allows the purchase of a buy-to-let residential property using your pension savings. Both offshore and onshore investment properties will be able to be held in relevant pension schemes. This is an exciting opportunity for property investors to reallocate their pension savings towards a villa in Cyprus, say, or an apartment in Spain. The immediate advantage of using a pension to own an investment property is that pension contributions are net of tax. Therefore, the purchase price of the property is effectively discounted by your tax rate.

High income earners will in effect be purchasing a property at a 40 per cent discount. Jim Roberts, Astute Financial Management's pension expert, says that "the Chancellor's decision to allow the purchase of buy-to-let property using pension funds will result in dramatic changes to the pension industry. The mix of tax advantages, higher pension contributions and residential property will make everybody more focused on securing their retirement. It will be especially appealing to investors who've recently experienced poor stock market returns."
 
Since the announcement of these changes, the markets have seen strong activity in people restructuring and consolidating their pension savings. Many property developers are already reporting a surge of interest in off-plan investment properties. While the government has already declared its decision to allow residential investment property as an asset class within pensions, it is yet to finalise the taxation details. Fortunately the chancellor already allows you to hold commercial property in a UK pension.

There are substantial tax benefits under the UK tax system of owning commercial property like this. Mortgage repayments are tax-deductible, rental income is not subject to tax and profits from the sale of the property are free from capital gains. Many in the industry hold the view that the rules governing holding residential investment property will be the same as those already in existence for commercial property. However, this is unconfirmed and at present represents no more than an educated piece of speculation. Should these advantages mirror residential investment property regulations then we expect this will cause a major boom for the offshore property market – particularly in those markets already very popular like Spain and Cyprus. However, it is also important to take into account the ramifications of the tax regime in the country in which you intend to purchase property. For example, France does not recognise that property can be owned through a pension. It is wise to get quality financial and legal advise before committing funds to any such purchase. The new legislation will also stimulate the pensions industry with individuals heavily incentivised to place more substantive funds into their pension. Moreover, the pension simplification reforms will provide numerous other benefits to investors.
 
For example, they will allow property investors to dramatically increase their pension contributions. From April 2006 private individuals will be able to contribute towards their pension the lower figure of £215,000 or 100 per cent of their total earned income per annum. This will allow many individuals to rapidly build a substantial pension portfolio.  The chancellor will also afford property investors the luxury of being able to leverage their pension funds to finance a buy-to-let property purchase. You will be able to borrow 50 per cent of the value of the pension to facilitate a residential investment property purchase. Therefore a property costing £150,000 could be purchased through a pension valued at £100,000. For investors with existing pension savings, the focus will need to be on structuring these funds to facilitate a property purchase. Given that most pension vehicles will not be able to hold buy-to-let property, you will need to have a self-invested persional pension plan (SIPP). Like any other pension, a SIPP is simply a means to provide retirement and related benefits to the policyholder.

The chief advantage of a SIPP is that it allows the policyholder greater control over the investment of their pension funds across a wide range of asset classes. Under a SIPP contract from 6th April next year the owner has the ability to invest in residential investment property, commercial property, almost all collective investment funds (unit trusts/mutual and hedge funds) and equities. In comparison, a typical personal pension contract may only allow the owner to invest their pension savings into a limited range of collective investment funds – some contracts may only offer a choice of around only 30 funds.

There are over 60 different organisations providing SIPPs. It is essential to obtain independent financial advice to assist you in reviewing what's on offer and determine the optimal contract for you. It is important to understand the cost structure of the contract. The flexibility of the contract is another important consideration as some providers have less room for movement than others. Finally, it is imperative to understand the provider's capacity to administer the purchase and ongoing costs associated with property ownership.

For further information:
Astute Financial Management

Financing options
This year is anticipated to be a boom year for overseas property investors, with the weaker dollar and the euro's attractive interest rates against sterling providing the incentive many UK buyers need to buy overseas and achieve some impressive benefits. Simon Conn of Conti Financial Services Ltd takes a look at the market and offers advice on where to buy, and how to ensure a successful overseas investment. Although the UK media is full of daily comments on the slowdown in the housing market at home,  the overseas property market generally is still showing steady growth, both in terms of demand and continuing house price appreciation.

Destinations in Europe are still overwhelmingly popular, with Spain, France and Portugal still filling the popularity top spots. Other  European areas popular with home buyers are Greece, Italy, and Southern Cyprus. It is clear, however, that buyers are becoming more adventurous and willing to travel further afield to get a sound return on their investment or simply to enjoy the benefits of a home abroad. Many people still take the route of re-mortgaging their UK property to raise capital for their overseas investment, this often leaves them to find their own way through the overseas home buying process.  There can be distinct benefits in using the services of an overseas lender and can help to avoid the pitfalls when buying abroad.
 
Mortgages are available in Europe usually up to 80 per cent of the purchase price (85 per cent in France) with repayment terms of up to 30 years. Interest rates in Euro are very competitive with a choice of fixed or variable rate loans. Low prices and the availability of properties suitable for buy-to-let schemes are leading some experts to believe these countries may provide an alternative for buyers who may find it harder to find the value-for-money deals that were once available throughout the traditionally popular countries.

However, caution is advisable as, in some countries, the necessary legal frameworks and lending services are not in place. Buying off plan is becoming increasingly popular, this is where the buyer agrees to buy a property which is not yet built – they see the plans and specifications and buy on this basis. Lenders will usually look at the plans and issue a mortgage offer, agreeing to make a loan. This will be when the property is finished in the case of apartments, and often in stage payments during construction for individual villas. It is a good idea to ask the builder to show you a previous development, and also to obtain in writing details of the quality of fixtures and fittings. An independent valuer will be able to give advice on the value of the property. The overseas property market is currently one of the most exciting and potentially beneficial investment options, and is expected to remain this way for the foreseeable future.

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For further information:
Conti Financial Services Ltd 

Article first published in February 2006