From: "Tumbleweed"
Newsgroups: uk.politics.misc uk.finance
Subject: Re: UK Property Market. Is the 'House of Cards' about to come crashing down.
Date: Wed, 23 Nov 2005 18:04:42 -0000
[deliberate top post to retain the context underneath but avoid having to
page through it as its *probably* not needed for this reply]
I think you have missed some fundamental things re your SIPPS 'debunking'.
I would doubt anyone with under 100k to put in a pension would bother
switching it into a SIPP, and I'd guess that the majority of people with
SIPPs are subject to the 40% rule, since SIPPs tend to be associated with
the better off (just as large pensions are). Hence most SIPPs will have more
than 100k and be for people who do pay 40% tax. Your maths is really all
about what proportion of the population will qualify, which is irrelevant,
what proportion of SIPPs qualify is what you should be focussing on.
Hence the majority of SIPPs *are* probably able to either buy a house
outright or 50% of it, assuming you need £100-£150k. The useful question is,
what proportion of those will? And the subsequent question is, what
percentage of the housing market is that? Only by knowing the answer to
those two questions can you make an informed guess at the effect of the new
rules on house prices.
--
Tumbleweed
email replies not necessary but to contact use;
tumbleweednews at hotmail dot com
"Crowley" wrote in message
news:1132741647.271972.76120@f14g2000cwb.googlegroups.com...
slate wrote:
> Maybe they are antisipating a surge when the SIPP rules change in
> April?
There has been considerable speculation that changes to SIPPS
(specifically the allowance to include residential property) may
invigorate the moribund housing market though this has been debunked by
many commentators.
Here is a critique by one of the organisers of the housepricecrash
site.............
quote : People keep posting and asking about SIPPs. We have chewed this
topic over months ago at HPC, but as always, Joe Public only wakes up
to the story belatedly and then rushes to jump on a bandwagon.
So very briefly, to debunk SIPPs once and for all, a very brief (and
thus not accurate in all details summary):
1. A SIPP is a self-invested personal pension. These have existed for a
long time. They are nothing other than personal pensions, which have
also been around for a long time, in which the beneficiary can make
his/her own investment decisions, rather than putting the money in
(often poorly performing and high charging) unit trusts. There is
nothing new about SIPPs. The only thing that is new from April 2006, is
that most restrictions about the classes of assets in which SIPPs can
invest will be lifted. Right now, SIPPs can only invest in shares,
bonds and commercial property. From April 2006, they will be allowed to
invest in just about anything, including residential property.
2. A SIPP fund, like any other pension fund, is a fund separate from
the personal assets of a person. The SIPP funds are legally owned by a
trustee for the benefit of the person whose pension the SIPP will
eventually provide. The SIPP fund is therefore not legally owned by the
beneficiary; this is very important, as we will see in a moment.
3. There has always been tax relief on contributions to personal
pensions. As SIPPs are personal pensions, contributions to the SIPP
fund also enjoy tax relief. There is nothing outrageous about this.
Personal pensions are taxed at the time the pension is paid out, as the
pension drawn from the SIPP fund will be taxed as income. What will
change from April 2006 is that the annual contribution limits have been
greatly increased (to £215k) with an additional lifetime cap. This
gives higher flexibility, because now someone can make higher
contributions, for example during years when their earnings are high.
This may, for example, benefit professional women, who might make very
high contributions during the years before they give up a career to
have children.
4. Tax relief is given on pension contributions at the marginal rate of
tax. In other words you need to be a higher rate tax payer in order to
get 40% tax relief on contributions to a SIPP. This is completely
ignored in the current hype, as there seems to be a general assumption
that everybody will get a 40% "discount" when "buying assets thorug a
SIPP". This is not correct. If you are not a higher rate tax payer,
then you ain't get 40% tax relief. Period. This already rules out the
majority of the population from the "40% discount".
5. Tax relief is, by definition, given only up to the amount of income
tax liability in any given tax year. In other words, you can only get
as much tax relief as your income tax bill is in any tax year. (subject
to an absolute annual limit of £215k) This prevents all but the
highest earners from "buying a property through a SIPP". Uninformed
writers talk about people "putting £100,000 in a SIPP and getting
£40,000 back". You need to have a tax bill of £40,000 in that tax
year in the first place to put £100,000 in a SIPP. We are now looking
at a very tiny fraction of the population who will be able to make such
contributions to a SIPP.
6. From April 2006, the borrowing rules for SIPPs will also change, and
it will be more difficult for a SIPP to borrow money. The SIPP will
only be able to borrow 50% of its assets (prior to the property
purchase). At current house prices, even the cheapest typical
investment properties (2 bed flats) start at £150,000. You would need
£100,000 already in your pension to make such a purchase. Even if you
have £100,000 in personal fortune, you would most likely not be able
to transfer this money into a SIPP, unless you have a £40,000 tax bill
(see above). Except for a tiny number of wealthy and very high earning
people, the whole idea just does not work.
7. Assuming someone has enough funds in their pension to buy a
property, the idea of transferring existing property held outside the
SIPP into the SIPP is still fraught with difficulties. As the SIPP
funds are legally owned by a trustee, the trustee must buy the
property. This will trigger stamp duty, as well as capital gains tax
(if there was a gain) in the case of a BTL property. If the property is
one's own residence, one must pay a market rent to the SIPP trustee.
The long and the short of this all is: unless you are a very high
earner, it is virtually impossible to put enough money into a SIPP in
order to buy residential property
Now, in light of this, let's look again at the claims made in the
press:
"property can be bought at a 40% discount when bought through a SIPP" -
Nonsense. The SIPP fund will pay the normal price for a property. It is
when the contributions to the SIPP were made that a 40% tax relief was
given, but one can only get tax relief up to one's tax bill, and 40%
tax relief is only given to higher rate tax payers.
"existing property can be transferred to a SIPP" - Nonsense. Nothing
can be "transferred" to a SIPP. If one wishes to "transfer" an asset to
a SIPP, the SIPP trustee must buy it from the beneficiary at the market
price. In order to do so, the money to pay for the asset must already
be in the SIPP, which can only have happened through contributions. And
these, as we have seen, are limited by one's tax bill.
So why the hype about SIPPs? Why are the falsehoods peddled by the
financial advisers and property developers? Surely, when it comes to
actually carrying out the transaction, most people will realise that
they cannot do it within the rules. The reason there is such a hype
now, is that SIPPs are being used by shady characters to sell their
products (such as BTL flats, wine etc.) now on the back of expectation
that "next year, when SIPPs come in, prices will go through the roof".
Indeed, fine wine prices have already risen by 20% in last three
months, even though SIPPs are not even coming in until April next year.
Once people start realising next year, that only a small minority will
actually be able to really benefit from the SIPP rules, the hype will
evaporate, and wine prices will collpase again, and this will also be
the final straw for the BTL market.
I hope this now clears things up once and for all.
http://www.housepricecrash.co.uk/forum/index.php?showtopic=16605
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