Have you heard of a SIPP? They can be a useful tool for investments.

Using a SIPP to save for retirement

A SIPP is a self-invested personal pension which is set up by an insurance company or specialist SIPP provider. It is attractive to those who wish to manage their own investments. Contribution to a SIPP may be made by both the individual and, where appropriate, by the individual’s employer.

Investments

The range of potential investment is greater for a SIPP than for a personal pension or group personal pension scheme.

The SIPP can invest in a wide range of assets, including:

  • quoted and unquoted shares;
  • unlisted shares;
  • collective investment schemes (OEICs and unit trusts);
  • investment trusts;
  • property and land (but excluding residential property); and
  • insurance funds.

A SIPP can also borrow money to purchase investments. For example, a SIPP could take out a mortgage to fund the purchase a commercial property, which could be rented out. The rental income would be paid into the SIPP and this could be used to pay the mortgage and other costs associated with the property.

Making contributions

Tax-relieved contributions can be made to the SIPP up to the normal limits set by the annual allowance. This is set at £40,000 for 2019/20. The annual allowance is reduced by £1 for every £2 which adjusted net income exceeds £150,000 where threshold income exceeds £110,000, until the minimum level of £10,000 is reached. Anyone with adjusted net income of £210,000 and above and threshold income of at least £110,000 will only receive the minimum annual allowance of £10,000. Where the annual allowance is unused, it can be carried forward for three years. Any contributions made by the employer also count towards the annual allowance.

SIPPs operate on a relief at source basis, meaning that the individual makes contributions from net pay. The SIPP provider claims back basic rate relief, with any higher or additional rate relief being claimed through the self-assessment return.

Drawing a pension

A SIPP is a money purchase scheme and the value of benefits available to provide a pension depend on contributions that have been made to the scheme, investment growth (or reduction) and charges.

It is possible to draw retirement benefits at age 55. A tax-free lump sum can be taken to the value of 25% of the accumulated funds. Withdrawals in excess of this are taxed at the individual’s marginal rate of tax.

To prevent recycling contributions, where pension benefits have been flexibly accessed a reduced money purchase annual allowance, set at £4,000 for 2019/20, applies.

Partner note: www.pensionsadvisoryservice.org.uk

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The letting of a jointly-owned property in itself does not give rise to a partnership, so what does?

Property partnerships

A person may own a property jointly that is let out as part of a partnership business. This may arise if the person is a partner of a trading or professional partnership which also lets out some of its land and buildings. A less common situation is where the person is in a partnership that runs an investment business which does not amount to a trade, but which includes or consists of the letting of property.

When is there a property partnership?

The letting of a jointly-owned property in itself does not give rise to a partnership – and indeed a partnership is unlikely to exist where joint owners simply let a property that they own together. Whether there is a partnership depends on the degree of business activity involved and there needs to be a degree of organisation similar to that in a commercial business. Thus, for there to be a partnership where property is jointly owned, the owners will need to provide significant additional services in return for money.

Separate rental business

A partnership rental business is treated as a separate business from any other rental business carried on by the partner. Thus, if a person owns property in their sole name and is also a partner in a partnership which lets out property, the partnership rental income is not taken into account in computing the profits of the individual’s rental business – it is dealt with separately.

Further, if a person is a partner in more than one partnership which lets out property, each is dealt with as a separate rental business – the profits of one cannot be set against the losses of another.

Example

Kate has a flat that she lets out. She is also a partner in a graphic design agency, which is run from a converted barn. The partnership lets out a separate barn to another business.

Kate has two property rental businesses. One business comprises the flat that she owns in her sole name and lets out, and the partnership rental business consisting of the barn which is let out as a separate rental business. This is a long-term arrangement.

Kate must keep her share of the profits or losses from the partnership property business separate from those relating to her personal rental business. She cannot set the profits from one against losses from the other. They must be returned separately on her tax return.

Partner note: HMRC’s Property Income Manual at PIM1030.

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Make sure you take into account stamp duty if you’re looking to buy a commercial property.

Stamp duty land tax on non-residential properties

Stamp duty land tax (SDLT) is payable in England and Northern Ireland on the purchase of property over a certain price. It applies equally to residential and non-residential properties, although the rates are different. Stamp duty land tax is devolved with land and buildings transaction tax (LBTT) applying in Scotland and land transaction tax (LTT) applying in Wales.

Non-residential property

As the name suggests, non-residential property is property other than that which is used as a residence. This includes commercial property, such as shops and office, agricultural land and forests. The non-residential rates of SDLT also apply where six or more residential properties are brought in a single transaction.

Mixed use properties

The non-residential rates of SDLT also apply to mixed use properties. These are properties which have both residential and non-residential elements. An example of a mixed use property would be a shop with a flat above it.

Rates

SDLT is charged at the appropriate rate on each ‘slice’ of the consideration. No SDLT is payable where the consideration is less than £150,000, or on the first £150,000 of the consideration where it exceeds this amount.

The rates of SDLT applying to non-residential properties are shown in the table below. They also apply to the lease premium where the property is leasehold rather than freehold.

Consideration SDLT rate
Up to £150,000 Zero
The next £100,000 (i.e. the ‘slice’ from £150,001 to £250,000) 2%
Excess over £250,000 5%

Example

ABC Ltd buys a commercial property for £320,000. SDLT of £5,500 is payable, calculated as follows.

On first £150,000 @ 0% £0
On next £100,000 @ 2% £2,000
On remaining £70,000 @ 5% £3,500
Total SDLT payable £5,500

New leasehold sales and transfers

The purchase of a new non-residential or mixed use leasehold property triggers a SDLT liability on the purchase price (the lease premium) and also on the annual rent payable under the lease (the net present value). The two elements are calculated separately and added together.

The lease premium element is calculated using the rates above, while the rent element is payable at the rates in the table below. No SDLT is payable on the rent if the net present value is less than £150,000.

Net present value of the rent SDLT rates
£0 to £150,000 Zero
£150,001 to £5,000,000 1%
Excess over £5,000,000 2%

Existing leases

SDLT is only payable on the lease price where an existing lease is assigned.

SDLT calculator

HMRC have published a handy calculator on the Gov.uk website which can be used to work out the SDLT payable on a commercial transaction. It can be found at www.tax.service.gov.uk/calculate-stamp-duty-land-tax/#/intro.

Scotland and Wales

The rates of LBTT payable on the purchase of non-residential properties in Scotland can be found at www.revenue.scot/land-buildings-transaction-tax/guidance/calculating-tax-rates-and-bands and the rates of LTT payable on the purchase of non-residential properties in Wales can be found at https://gov.wales/land-transaction-tax-rates-and-bands.

Partner note: FA 2003, s. 55, 56.

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