‘Death tax’ cut to prompt pension property boom

Self-invested personal pension providers are reporting an increase in commercial property investments amid claims from across the sector that the abolition of ‘death tax’ charges could precipitate a boom in property investments through self-directed pensions.

At the end of September, chancellor George Osborne announced that pension funds paid out before or after the age of 75 will no longer be subject to the 55 per cent tax charge when transferred as a lump sum within a pension. Beneficiaries of those who die under the age of 75 will not pay any tax on withdrawals, even if they take the fund as a single lump sum, while for those over 75, withdrawals will be taxed at marginal rate and lump sums initially at 45 per cent.

Historically, holding property in Sipps or small self-administered pensions has been constrained due to issues with unwinding what are illiquid holdings as members approach and enter retirement.

However, providers claim that changes to allow assets in a pension to pass to a beneficiary on death without the 55 per cent charge, more may be inclined to take the option.

Xafinity predicted that this could see the emergence of the ‘multi-generation or family Ssas’, where the founding fathers of a company can pass down large pension funds to family members without the 55 per cent death tax charge.

From next April people can pass drawdown pots on to any beneficiary at death, so Ssas members may take their tax-free cash and leave their remaining drawdown pot invested in property, with the scheme continuing to receive rental income which the member can access as required.

The firm explained that with the property remaining in the tax wrapper of the Ssas, any growth on the value of the property will be free from capital gains and the rental income will continue to increase the pot.

Jeff Steedman, head of Sipp and Ssas business development at Xafinity, said: “Whilst Ssas’ are more likely to have property assets in them due to the length of time they have been around, Sipps with property are affected in a similar way.”

Claire Trott, head of technical support at Talbot and Muir, agreed: “This works particularly well for family businesses, where previously if the pension including the property were to be left to a non-dependent child then it would need to be paid and come out of the pension environment.

“Under the new rules there doesn’t need to be a transfer of the property or even a sale to be able to pass the fund including the property down to the next generation on death.

“This has two main benefits: the property can continue to grow in the tax privileged environment and if passed down pre-75, any income from the rental of the property can be paid out tax free.”

Speaking to FTAdviser, Matthew Rankine, technical sales and marketing manager at Liberty Sipp, said that while the attitude used to be to “get rid of the pension and protect your savings”, that had now been flipped on its head.