Buying property through your pension
Why are people looking at buying a property through their pension?
Many people have built up a level of savings and are wondering how to invest. With interest rates so low, the return on these funds has been practically non-existent. Meanwhile DAFT's latest available rental report has nationwide average rental yields for 1-bedroom apartments at 9.4%, 2-bed at 8.8% and 3-bed houses at 7.6%.
Furthermore, when a property is acquired through a pension vehicle, the rental income is not subject to income tax. Moreover, there is no capital gains tax on the sale of the property.
On retirement, the property can be transferred to an ARF (Approved Retirement Fund) and can continue to generate a post-retirement income. It can ultimately form part of the estate and be passed on to the ARF holders' family.
Owning property in a tax-efficient way like this has always been popular in Ireland.
What's a common example?
One idea that is often utilised is buying a property and leasing it to a local authority on a long-term lease. Leases can be up to 25 years. This gives effectively long-date state-guaranteed income. And it's tax-free income !
But did I hear that the rules have changed and that it is no longer possible to buy a property with a pension?
The rule you are referring to is the EU Directive, IORP (Institutions for Occupational Retirement Provision) II. In April 2021, it was transposed into Irish law.
It does not allow borrowing in occupational pension schemes. It doesn't prohibit a pension fund from buying property. But it states, that for new investments, no more than 50% can be invested in property. This is sensible and encourages a diversified approach across property, equites, fixed income etc.
This regulation does apply to small self-administered pension schemes. SSAPS have been the most common pension vehicle for property investments in Ireland. This is because they are easier to ramp up with more flexibility on contributions.
Existing investments are not affected so if you have already established a SSAPS and invested in property, you don't need to be concerned about the new regulations. But it applies to all new investment.
Ok, so buying property in a pension is not possible in the future?
These regulations only apply to occupational or company pension schemes. They do not apply to PRSAs, buy-out bonds (BOB), personal pensions or ARFs. Tax efficient property investment is still possible.
However, there are plenty of things to note. A BOB is effectively closed to new contributions. Also, PRSA contributions are limited and tied to age and salary. It takes longer to ramp up a PRSA for property investment.
Come and speak to us at AM Financial and we will take you through your options.
Ok, but one more thing, can I top up my purchase capacity in my pension with mortgage funds?
Yes. The traditional banks are ready to lend for investments in commercial properties. ICS/Dilosk are ready to lend for the purchase of residential properties. In general, mortgages are possible up to 50% of the purchase price. The maximum loan size is €500,000.
The loan term is limited to a maximum of 15 years. This is a Revenue rule. Also the term of the loan will have to be less than or equal to the lease term of the target property. The idea here is that loan repayments are covered by rental income only and are not reliant on future pension contributions.
As discussed before, lending to SSAPS is not allowed.
What are the other Revenue rules?
The purchase of the property must be for the sole purpose of providing benefits on retirement. Trading is not possible - for example, the scheme trustees cannot acquire and develop a property with a view to disposal.
It must be at arm's length. A pension scheme cannot buy or sell property from the member, the member's employer or anyone connected with the scheme member. Also it cannot be let to relatives or their employer. Any personal use of the property is prohibited.
Who else is involved in the process?
A trustee is required. A unit trust structure is used and a specific sub-fund is used for each property. This means that when borrowing, the lender only has recourse to the sub-fund and not to the pension itself. It also means that the property can be transferred to an ARF on retirement without the need to pay legal fees, stamp duty or capital gains tax.
You will need a solicitor. A property manager (PRSA licenced) will be appointed to collect revenues and pay expenses on the property. And you will need to get the property insured.
What's the skinny?
Tax-efficient property investment is still possible. However, the. rules have changed a bit. Come an speak to us at AM Financial to find out how best to navigate.