What Are My Options If My Pension Scheme Has Insufficient Funds to Purchase Property?

Property investments in self-administered pensions have long been a specialty of ITC, and many of our clients have benefited from the strong yields generated by buying property with their pension funds.

The tax benefits of purchasing property through your pension scheme can be significant. Rental income on the property is not subject to Income Tax, and no Capital Gains Tax is paid on any gain made if the property is sold.

So what are your options if your scheme has insufficient funds to buy the property you want to invest in? The first step will be to consider your different options with an independent financial advisor. Here are some of the possibilities available to you in this scenario.

Co-Ownership:

Some clients opt to co-own properties through their pension schemes. You can purchase a property with one or more ITC pension schemes. There must be a pre-existing relationship between the scheme members, for example a husband and wife or business associates. The property is purchased through ITC’s unit trust structure, a flexible structure allowing schemes invest in any split e.g. 20:30:50. It allows for investment ownership to change over time through investment/divestment from the trust.

This option is suitable for investors at different stages of life. Units in the trust are easily transferred from pre-retirement vehicles to post-retirement vehicles with no tax implications or conveyancing costs.

This can be an attractive alternative to borrowing where 100% ownership of the property is held by the pension schemes with no loan interest or repayments. Rental income is directly available for returning to the invested schemes, after any property costs are discharged.

Borrowing:

Some clients opt to use borrowing when purchasing properties in their pension schemes.

Only pre-retirement vehicles can take out lending. Due to the implementation of IORP II, Personal Retirement Savings Account’s (PRSAs) and Buy Out Bonds (BOBs) only are permitted to enter into lending arrangements. ITC can facilitate mortgages of up to 50% loan to value and these can be arranged by the pension member and their mortgage advisor.

ITC works with banking institutions to facilitate borrowing against property in pensions. As a result, a lending option for residential property is available through ICS Mortgages (Dilosk). Loans for commercial property are available through other banking institutions.

Pension borrowing is always granted on a limited recourse basis, meaning that the lender cannot pursue the assets of the trustees or the pension scheme member in the case of default. Only the property purchased can be used as a security. All loans must be repaid in full before retirement, with the maximum loan term being 15 years.

Combination of Co-Ownership and Borrowing:

It is also possible for clients to combine the above two options, that is, to invest with other ITC pension schemes and avail of borrowing. The same borrowing rules as set out above apply and it is necessary that all investing schemes are pre-retirement vehicles (BOB or PRSA). The loan will have to be repaid in full before the retirement of any invested scheme.

If you are interested in investing in property through a pension, contact your financial advisor or email justask@independent-trustee.com for more information.

Georgina O'Shea, ITC Legal Executive