Pension Property Case Study

Jennifer is interested in buying an investment property in a well located area in Galway, which is on the market for €200,000. She is a higher rate tax payer and her plan is to hold onto the property for 15 years. Jennifer is considering buying the property through her pension but would like to know the financial advantage over buying it personally.

Assumptions:

• Property Market Value - Increases by 5% per annum.

• Rental Yield - 6% per annum.

• CGT on point of sale - 33%

• Tax on income (incl. income tax, PRSI and USC) - 52%

Property Bought Through Pension:

If the property is purchased through a pension scheme, no tax is paid on the rental income and when sold, the sale doesn’t incur CGT. We estimate that the value returned to the pension over the period (including rent earned over the 15 years and the sale proceeds after the property is sold) would be in the region of €763,000 in this case.

Property Bought Personally:

If the property is bought outright, Jennifer would be liable to income tax on rental income earned on the property, and the gain on the growth of the value of the property would be subject to CGT. The value returned to Jennifer after 15 years would be in the region of €441,000.

This means if Jennifer is to buy and sell the property through a pension scheme, rather than outright, the property would generate an additional €322,000.

Its important to note that through the pension she will pay income tax when she draws down funds as an income however depending on her circumstances may pay a lower rate of tax and benefit from a higher pension pot thanks to the tax savings on the rent and sale of the property.