SIPP in the context of reducing the agony of Section 24 tax changes

Hi Karen,

The FCA handbook definition: Self-invested Personal Pension Scheme

"An arrangement which forms all or part of a personal pension scheme, which gives the member the power to direct how some or all of the member's contributions are invested."

From the Pensions Advisory Service >> https://www.pensionsadvisoryservice.org.uk/about-pensions/pensions-basics/contract-based-schemes/self-invested-personal-pensions-sipp

"Self-invested personal pensions (SIPPs) are a type of personal pension. They are an individual contract between you and the pension provider. However, SIPPs offer much wider investment powers than are generally available for personal pensions and group personal pensions.

The wider investment powers can allow you to invest in a wide range of assets, including:

quoted UK and overseas stocks and shares
unlisted shares
collective investments (such as OEICs and unit trusts)
investment trusts
property and land (but not most residential property) insurance bonds.

A SIPP can also borrow money to purchase some investments. For example, a SIPP can raise a mortgage to part-fund the purchase of a property. Such properties would normally then be rented out and the rental income, received by the SIPP, can be used towards servicing the mortgage repayments and the costs of running the property.

Not all SIPPs allow you to invest in the full range of allowable investments. SIPPs that hold specialist investments (such as property) may be liable to pay higher charges than schemes that hold ‘mainstream’ investments."

Advice on Pensions is one of the most highly regulated areas of personal finance advice that can be given under the FCA and you should not act upon any advice unless given by a qualified, regulated and insured pensions advisor.

A Pension is a tax efficient investment for retirement planning and as such is separate to the tax treatment of residential rental income for individuals. You also can't transfer residential property into a SIPP.

Perhaps I am missing something?
Instead of putting money into a SIPP why not simply utilise that money by paying off the mortgage?

Good question Karen, I hope there's an IFA on here that can answer it, but I think that you might get higher rate tax relief on the pension contribution, rather than use the contribution itself as an income deduction. (David I think the point is that mortgage costs are £15k pa, so the mortgage is lets say £300k at 5%pa, or £500k at 3%pa, which means paying down the debt at £20k pa would take years and in the meantime Karen will still be paying higher rate tax)

I speak as a private individual and any comments are not advice and should not be taken as such.

I am glad to see someone else is looking at SIPPs. I think they are great. You can invest and get an average stock market return probably higher than from a BTL investment. You pay tax at only three quarters of your marginal rate when you remove money from the SIPP (or take 25% tax free) and can get standard tax relief as well. As a landlord with rental only income I believe you can invest up to £3600 gross annually (but check this). So why would you pay off the mortgage? Your SIPP asset sits outside your estate which helps with Inheritance Tax. For the last few years I have invested in a SIPP each April, the maximium I can with rental only income. I look forward to April coming each year now! If you are working for a salary as well you can claim tax back at 40% if you are a higher rate payer. Whats not to like? I have a SIPP, my wife has a SIPP and I do believe this helps significantly with post section 24 tax management.

As always, take proper financial advice before doing anything.

As we knew we were going to be affected by S24 my wife and I have already taken out SIPPs. We took them out on the 6th April 2017 and just put the premiums into a couple of broadly based investment trusts which already have shown about 7% capital appreciation. We were just in the 40% bracket in the last tax year but the new rules mean we will be well inside this band so we will definitely be getting 40% tax relief on these premiums. Not advertising but we used AJ Bell Youinvest as they have very low charges.

Hello Karen. That is exactly what I do. My employer allows me to pay into my SIPP as salary sacrifice and also matches some of my payments. Salary sacrifice means that part of my salary goes straight into my SIPP before tax and doesn't appear on my tax return at all. So for example if I earn £50k and sacrifice £20k per year into my SIPP then I can earn about £12K in property income before I hit the £42k higher rate tax threshold. As I am over 55 I can also withdraw 25% from my SIPP as a tax free lump sum. I think the same applies if you don't have salary sacrifice but you have to claim the tax relief separately but I am not qualified to advise and you should consult a tax specialist. If you do withdraw money from the SIPP be very careful. If you take out a penny more than your tax free allowance you can no longer pay in and get tax relief as you could before. It's like a door slamming in your face that discriminates against people who retire and then change their minds.

Karen

This is a very good question as the tax relief (for a 40% taxpayer) on mortgage interest payments is going to hit hard especially in a few years time whereas you can claim the full tax relief on mortgage interest payments as a basic rate taxpayer.
If you make contributions into a Sipp as a higher rate taxpayer you can reclaim the additional relief via your tax return. You can put up to £40,000 p.a and go back two further years and use that allowance also. By placing enough into your Sipp to reduce your income to make you a basic rate taxpayer I do not know if this is how it works. But if you are on the cusp (or just over)of being a higher rate taxpayer and you can place money into a Sipp to make you a basic rate taxpayer then this could work for a lot of Landlords. If there are any accountants out there to correct and advise on this thread then I would be grateful for a reply

You can only put non-property earnings into the SIPP and there is a cap of £40k. However if your properties are in a limited company or spv you may be able to pay yourself a pension that could be a SIPP and gain tax benefits that way. Comment from a qualified tax expert would be useful as its easy to make mistakes and mess up the whole thing with no backtrack. There is a lot on pensions in the Tax Cafe books.

I am not an accountant but I have a good knowledge of the tax system. When you make a payment into your SIPP you deduct 20% at source. As an example £5000 into your pension plan you only actually pay the SIPP provider £4000. They claim the 20% tax back from HMRC and a couple of months later you SIPP account is credited with the £1000. Now when you do your self assessment tax return at the end of the year you put all the £5000 down as a payment into a pension plan and if you are a 40% tax payer you get the other 20% tax relief. How the tax inspector does this is quite simple. You 20% tax band for 2018/19 which is £34,500 will be extended by £5,000 to £39,500 so in effect you can earn £5,000 more than you previously could have earned but only pay 20% tax on it.

Reply to the comment left by Chris Unwin at 16/01/2018 - 10:38
If you only receive rental income you can invest max £3,600 and get tax relief, but you can invest more than that (without getting tax relief).