Savvy investors are still putting overseas property in
their pensions despite Labour's attempts to stop them
LAWYERS for some of Britain's wealthiest residents have
uncovered a loophole in the pension rules that allows
people to buy holiday properties with their retirement
funds. Scores of investors, including senior directors at
some of the City's top firms, have been quietly taking
advantage of the perk to purchase holiday apartments in
French ski resorts, coastal towns and even Paris with their
self-invested personal pensions (Sipps). It had been
thought Gordon Brown had stamped out the practice in
December when he reneged on an earlier promise to allow
Sipps to invest in residential property from April 6,
including buy-to-let flats and overseas holiday homes.
However, lawyers have found a way to circumvent the rules
by purchasing tourist apartments under the French
"leaseback" scheme. These are usually classed as commercial
properties and so qualify for Sipps. Sykes Anderson, a firm
of solicitors, has purchased scores of French leaseback
properties for its well-heeled clients in the past few
weeks, and hopes to branch into Spain, and possibly other
European countries that also offer leaseback. Another firm
is touting property in Cyprus for your Sipp. However, Sykes
Anderson has asked all professionals involved in its scheme
to sign confidentiality agreements to prevent precise
details leaking out to the wider market. There are fears
the chancellor could clamp down on the practice if ordinary
investors start to pile into the plans, as he did with
residential property.
It emerged last year that investors were preparing to
stockpile up to £10 billion in their Sipps to purchase
buy-to-lets and holiday homes from April 6, which would
have cost the government £4 billion in tax relief on the
contributions. When the scale of interest became clear it
was forced to backtrack on the rules. David Anderson,
chairman of Sykes Anderson, said: "Brown's u-turn may
appear to have ruled out using a pension to buy French
property, but it is still possible. However, we do not see
this as a mass-market product and we would certainly not
want the man in the street to think about buying a
leaseback property with his Sipp. With a pension of less
than £300,000 to £400,000, fees will take a big portion of
your fund."
Mark Nathan, 48, works for a well-known IT firm, and is one
of the investors who has used Sykes Anderson to buy a
leaseback property with his Sipp. He recently completed the
purchase of a self-contained apartment within a chalet in
Les Gets, a French ski resort. Nathan said: "One of the
main attractions is that I have control over my pension and
the underlying asset. I also think there is potential for
good capital growth — demand for apartments in the Alps is
strong and it is difficult to get permission for new
builds." However, he said prospective investors should not
be under any illusions. "I have to point out that the
process was complex, expensive in terms of the fees and
very hard work," he said. "However, I am confident that the
investment will provide a far higher pension income that I
would obtain by investing the funds in the usual way."
Under the French "leaseback" scheme, you buy a
self-contained tourist apartment in a development and lease
it back to a management company, which then lets it to
holidaymakers on your behalf.
The developments are particularly common in French ski
resorts, where firms such as Pierre & Vacances manage the
properties on behalf of their owners, and are also
typically found in Paris and coastal towns such as Nice and
Cannes.
They are classed as hotels, which are still eligible for
Sipps — as long as you do not have any accommodation rights
over the property. Most standard French leaseback schemes
allow owners to stay in the property free for two to four
weeks a year, so you would have to revoke this right before
buying the flat with your Sipp. You would be able to stay
if you paid an open market rent, but Sipp providers
discourage it. Revenue & Customs confirmed last week that
leaseback properties qualify for Sipps. "Provided it is
classed as a hotel and there are no rights to
accommodation, it is not taxable and can be held in a
Sipp," a spokesman said.
You do not have to invest through the leaseback scheme: you
could always source a hotel or tourist apartment yourself
and hire a management firm. But the leaseback scheme cuts
out the hassle of finding a property and attracts generous
tax breaks in France. Leaseback properties are exempt from
French Vat of 19.6% inside or outside a Sipp — as long as
you own them for at least 20 years. If you sell before
then, you will have to pay back the Vat. Leaseback Sipps
also attract generous tax breaks in Britain. When you
contribute to a UK pension, the government offers tax
relief of 22p for every 78p invested. A higher-rate
taxpayer can claim a further 18p through their tax return.
So it would cost just £60,000 to get a fund of £100,000.
Your Sipp can also borrow 50% of the value of its assets to
buy property, so you could buy a leaseback apartment worth
£150,000 with a fund of £100,000 and an outlay of only
£60,000. French leasebacks generally guarantee a rental
income of 4% or 5% after expenses for a fixed term, usually
rolling periods of nine years. This would be paid into your
Sipp and used to pay off any mortgage. Anderson admits a
rental income of 4% or 5% is little better than the return
on a deposit account. The real reason why investors are
buying leasebacks, he said, is for capital growth.
However, other professionals question the growth potential
of leasebacks, which have to be new or totally rebuilt
properties. Peter Esders of John Howell & Co, a firm of
international solicitors, said: "As with any new-build
development, there could be a glut of supply if a lot of
people decide to sell up at the same time." Anderson
recommends that you buy only in the most desirable parts of
France to maximise your returns. "Don't think about
Normandy, Brittany and Languedoc because you are just not
going to get the returns."
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Written by Nick Dowlatshahi Managing Director of Leapfrog
Properties who are French Property agents that specialise
in Property for sale in France.
http://www.leapfrog-properties.com
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