54: The likely impact of Gordon Brown’s U-turn on Residential SIPPs
Oh No! It was too good to be true! Just when all the hard working higher earning employees were thinking of rolling their but-to-let holiday homes into their pension funds – saving 40% in the process, Gordon Brown woke up to the fact that the wealthiest 10% of the UK would drastically reduce their 40+% tax bill. It would have been a monumental mistake for a socialist who likes to see re-distribution of wealth rather than concentration of wealth.
The Losers: The big losers will be the 40% salaried employees, who rightly had the vision of buying a retirement / holiday home for the future, and letting it out in the meanwhile. Property prices in rural and holiday areas were set to benefit strongly from this quirk – and foreign holiday home prices would also have also benefited.
Even if you are not a socialist like Brown, you might understand that the UK Treasury subsidising the top 10% wage earner’s foreign retirement home purchases to the tune of 40% would not benefit UK PLC. In effect, this would lead to massive cashflows leaving the
Forget the people complaining they have wasted say £500-£1000 setting up a SIPPs trust that cannot now be used for their chosen residential property investment - the biggest losers are likely to be the financial services business that would have had multiple streams of income from such SIPPs provision, namely:
- Commission and fees from setting up the SIPP
- Commission and fees on purchasing property to roll into the SIPP
- Commission and fees on managing the property within the SIPP
- Commission and fees acting as trustee to the SIPP
- Commission and fees for legal and tax work related to maintaining the SIPP
These fees and commissions would likely have been charged at a premium in view of the substantial tax savings SIPPs owners would have incurred. Plenty for many. Alas, it is not to be.
More Bad News on Gearing: Another major fly in the ointment – currently, private business owners - those hard working high risk taking "endangered species" (in the current climate) can gear 25% cash to 75% borrowing and purchase commercial property to roll into their SIPP. However, after Gordon Brown pulled the plug on residential, it seems he also incurred a 66.7% cash to 33.3% borrowing rule that allows far worse gearing than before. The property industry is lobbying hard to have this reversed – but if it is not, it will be the death of the property related SIPPs – and a major degradation of what we have at present. In essence, commercial would suffer as well as residential.
Non Losers: The “non” losers will be the individual private property investors who do not have a salaried income with tax at 40% (or low wage earners in the 10 – 22% bracket), and have a low tax burden already because of offsets. Additionally, those investors that do not have much free cash and did not like the prospect of only gearing to 66.7% cash to 33.3% borrowing – most of these professional property investors like to gear to a minimum of 50% cash to 50% borrowing or up to say 10% cash to 90% borrowing. First time buyers, particularly in rural areas, will also find it easier to get on the housing ladder - and not have to compete with top 10% wage earning holiday home purchasers.
REITs - Some Better News: Property investors that are not exposed or interested in holiday homes in coastal or rural areas, both in the UK and abroad, will also not loose out. This is because Real Estate Investment Trusts will be introduced which will stimulate residential property investment. The bulk of such investment will be in residential and commercial property in cities and towns in the
So all is not lost: I know its galling just thinking about it – but at least it has highlighted ways to reduce tax burdens by investing in REITs for pensions – and this should stimulate property investment and demand for investment property – particularly in the built up urban areas.
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