Pensions, Property and Inheritance Tax
The Inheritance Tax (IHT) advantages available to non-UK domiciliaries have been curtailed by extending the scope of IHT to include all UK residential property regardless of the ownership structure in place. It is therefore an opportune time to remind or familiarise oneself with the tax efficiencies offered by contributing to a UK registered pension and the advantages of holding assets, which may still include commercial property, within them.
Ultimately pensions are merely a tax-efficient structure capable of holding various investments. Qualifying contributions made into a pension receive tax relief, any growth in the value of the assets are tax-free whilst held within the pension wrapper and typically 25% of withdrawals are tax-free.
Whilst the tax treatment of pensions outlined above are often understood, the fact that they are not included in the value of an individual’s estate upon death is still often overlooked. Any potential future tax does, however, depend upon the age of the individual at their date of death and the way in which beneficiaries make withdrawals.
The following applies to defined contribution pensions, such as personal pensions or self-invested arrangements, such as SIPPs (Self-Invested Personal Pensions) and SSASs (Small Self-Administered Schemes). Since April 2015, if an individual dies before their 75th birthday, whatever is left in their pension can be paid, whether it be as a lump sum or regular or ad-hoc withdrawals, to the nominated beneficiaries tax-free. If death occurs at or after age 75 those payments will be taxable at the recipient’s marginal rate of income tax. In addition, beneficiaries no longer have to be spouses or financial dependents and pensions can now potentially be cascaded down the generations.
These changes have led to significant planning opportunities, particularly where pensions hold property.
Given the substantial costs of purchasing a property this will not be an option for everyone. However, previously accrued pension policies could be consolidated into one arrangement from which the purchase could then take place. In addition, self-invested pensions can borrow up to 50% of their net value to help fund a desired purchase and a number of individuals’ pensions can potentially be grouped together in order to amass sufficient funds.
There are often misconceptions surrounding pensions which typically concern issues such as restrictions in the types of assets that can be held within a pension. In fact there are very few restrictions, in terms of permissible investments that a pension can hold. The big restriction is residential property, and this should be borne in mind when considering the contents of this article.
In addition to the above, the pensions Annual and Lifetime Allowances impact appropriate contribution levels and pension fund sizes which need to be taken into consideration both now and in the future.
Those points aside, pensions remain a very tax-efficient way of holding commercial property throughout an individual’s lifetime whilst also preventing it from becoming subject to the UK IHT net on death. At the same time the appropriateness of the investment, along with the investor’s personal circumstances and objectives, need to be considered as usual.
If you would like to discuss any of the issues raised here, please get in touch with Michael Lapham or your usual contact at Mercer & Hole.
Date: 3rd May, 2018
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