Service France

Conversation between David Anderson, solicitor and chartered tax adviser at Sykes Anderson LLP, and a UK resident about buying a French leaseback jointly with a SIPP.

Please note that the information herein is of a general nature and you should not act or refrain from acting on it without professional advice on the specific facts of your case. Taxation and law are complex subjects and the information herein is intended only for general information. Nothing herein constitutes financial advice.

Q: I have £150,000 in my pension plan and am considering transferring it to a SIPP. Do the SIPP rules mean that I can only borrow half the value of my fund i.e. £75,000 and the upper price limit on any leaseback property is accordingly £225,000?

A: Yes, you are correct. The amount your SIPP can borrow is limited to half the value of its assets. However, there is nothing to stop the SIPP purchasing a property with you. In other words, you could use the £150,000 in the SIPP to purchase part of the property and you could purchase the rest. No limits will then apply to the part you buy because it has nothing to do with the SIPP.

Q: So are you saying that if I put down the £150,000 in my SIPP and say borrowed a further £300,000 I could purchase a £450,000 leaseback?

A: Yes. One third of the property would belong to the SIPP and two thirds would belong to you. It is up to you how you fund the two thirds. This could either be with cash or with borrowings or a mixture of the two.

Q: I would like to borrow the £300,000 I am putting into the investment. Would it make any sense then for the SIPP to borrow any money?

A: Normally not. Say the net rental from the property is £21,000 per annum. £7,000 will have to go to the SIPP amounting to its one third share of the property and £14,000 will go to you because of your two thirds share of the property. The £14,000 can be used to pay the interest on the £300,000 mortgage. The interest you are paying the bank on the loan you have in your own personal name can be deducted against the rental you are receiving on the leaseback which in most cases will mean that no tax is payable by you personally. The £7,000 which the SIPP receives is completely tax free in the UK because the SIPP is a tax exempt vehicle. You should, however, bear in mind that the SIPP is not viewed as tax exempt in France though the net tax actually payable will be very small (if any).

Q: Does this mean that I can use the property personally myself?

A: No. Although there are some regulations which allow you to pay a market rental in these circumstances there is a real danger that you will fall foul of provisions in the Finance Act 2006 and make the entire SIPP taxable. Accordingly, it is best not to make any personal use of the property at all. You should instead concentrate on maximising your income yield.

Q: Are there any difficulties in my co-owning the property with the SIPP?

A: Yes. It is important that the structure in France is properly set up to allow you to do this. This can be done in a relatively simple way though professional advice is essential here. You should also use SIPP trustees who are experienced in investing in French commercial property. Before transferring your pension fund to any SIPP trustees you should ask them whether they have purchased French properties before and how they have structured the investment.

Q: Can I transfer part of my share to the SIPP?

A: Yes. Under the structure we use this can be done very simply and without the intervention of a French notaire. In other words if you wish to transfer say £30,000 from your share into the SIPP in order to trigger tax relief this can be done quite simply.

Q: Are there any other angles on this under which I can trigger income tax relief back in the UK?

A: Yes. If we go back to the example above and assume that after say two years the £450,000 property which you have purchased has gone up by £150,000 to £600,000 then the equity which you have will now be two thirds of £150,000 i.e. £100,000. The equity growth which the SIPP has is one third of £150,000 i.e. £50,000. It is possible for you now to transfer the £100,000 equity growth into the SIPP. Assuming your earnings were say £100,000 in the relevant year this would mean that you would have £100,000 to set against your UK income and would pay no UK income tax in the relevant year. This is one of the few situations in which you can get UK income tax relief without actually making a cash pension contribution.

Q: Sounds too good to be true. How do you deal with the mechanics of this?

A: You need to get a reputable estate agent to value the property. You cannot technically make a contribution in specie to a SIPP. What you need to do is to agree a price with the SIPP trustees for the part of the property you are putting into the SIPP and then for this price to be satisfied by a transfer of part of the equity of the property into the SIPP.

Q: Is there capital gains tax when I dispose of the property into the SIPP?

A: Yes. This will be a disposal but the property should qualify for business taper relief and your capital gains tax exposure should be a maximum of 10%. You will also have a capital gains exempt amount of £8,800 and if the property is owned by you and your wife this will amount to an exemption of £17,600 which sadly most people never make use of each year.

Q: Any other points I should be aware of?

A: Yes. You need to make sure that the property is of good quality and is going to be acceptable to pension fund trustees. This is particularly the case with leaseback properties as they are hands off investments and the trustees will want to make sure that the rents will be paid and that the build quality is satisfactory. You should have no difficulties with large reputable companies such as Pierre et Vacances and smaller companies will also be acceptable provided the pension trustees are satisfied that the investment is and is likely to remain solvent and that the property is saleable if a pension or other benefit has to be paid out.