Pension pot in the sun
Nigel Lewis, Daily Mail
30 September 2005
The Government is to give huge tax breaks for those investors buying in Cyprus, Malta or Mauritius. Nigel Lewis finds out why.
The grey world of pensions is about to get more colourful when the Government introduces a property-based pension that - for the first time - allows savers to invest in property tax-free to provide for their retirement.
Rather than buy stocks and shares with their pension cash, investors will be allowed to buy residential properties instead.
And as with traditional pensions, the Government will both contribute to your fund (and give you 22p for every 78p you invest, more if you are in the 40% income tax bracket) plus offer tax relief on any profits (capital or rental income) that your fund makes from a property.
Any house you buy in the UK can be purchased using your pension, but adding a more exotic place in the sun to your investment fund is problematic.
According to accountants PriceWaterhouseCooper, the number of countries that allow British investors to buy a property through a Self Invested Personal Pension (SIPP) are limited to three: Cyprus, Malta and Mauritius. That's because only these islands, which used to be British colonies and have legal systems similar to ours, allow properties to be owned indirectly as investments or 'unit trusts'.
Few people realise the difference this could make. When property-based SIPPs are introduced in April next year, it is said they will pull in billions of pounds into the property markets of these islands.
'Existing SIPPs are worth around £20bn, but we expect this to increase substantially to £80bn when property-based funds are introduced next April - and a substantial portion of this will be invested in foreign properties,' says Lyn Webster of investment specialist O'Garra.
Of the three countries, the most likely to benefit from this possible investment bonanza will be Cyprus, which is one of the most popular places to buy a home in the sun after Spain and the US, and the most tax-friendly destination to buy a property through a self-invested pension. That's because any rental income you earn from your property investment is not taxed at source.
Cyprus is already booming, so this extra cash pouring in is likely to make it the new Majorca and transform it from the relatively affordable middle-market holiday home destination it is today into a property hotspot.
Prices are already rising by more than 15% a year in areas such as Paphos and Limassol.
And this is what you do
SO HOW do you finance a SIPP property on one of these islands? For example, take this £150,000 newbuild three-bedroom villa for sale in Paphos, Cyprus.
To buy it through a SIPP pension requires the buyer to put down a deposit of £60,000 (to which the Government then adds £40,000 as tax relief). Other expenses (such as solicitor's fees) would add up to about £5,850. Include the tax-free cost of a mortgage over 25 years (£60,000) to pay the balance and the £150,000 villa will really cost £125,850.
Over the 25 years this villa should appreciate in value substantially and can also be rented out to holidaymakers - so the equity (when you sell it) and the rental income all goes back into your pension tax-free.
Like any investment, there are risks involved. The villa may prove difficult to rent out, will require repair work over the years and will also take up time and effort to manage (or you may have to pay an agent to look after it). Also, the property market in Cyprus could crash and you'll end up with a house worth only marginally more than you paid for it. But assuming you are going to own it for 25 years or more, this is a low risk.
• More information from property investment specialist O'Garra on 00 35725 503 202.
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