# Property In Self Administered Pension



## daltonr (18 Apr 2003)

I know this is an issue that has been mentioned, but I can't find an answer.

A property investment by a Self Administered Pension
Trust can not involve bowrrowing.  Surely this
greatly limits the usefulness of property.  If the trust
must actually have the entire cost of  a piece of
property in cash before investing.

Is there any way for the company to borrow the money
and contribute the borrowed money to the trust. 
Of course even this would be tricky because you can't take pay the mortgage back with the proceeds of renting the property since that's tied up in the trust.

Isn't this a big problem with these trusts?

-Rd


----------



## ClubMan (18 Apr 2003)

Is  relevant to your query?


----------



## daltonr (28 Apr 2003)

Thanks Clubman.
Interesting thread but I'm not convinced.  The
explaination of how to possibly get around the
problems sounds a bit dodgy.


> In general the self administered scheme is investing in > another vehicle such as a company or unit fund which > in turn purchases the property using gearing. In that 
> way the investment complies with Revenue criteria as > the scheme isnt borrowing.

Sounds like I'd have to set up a second company which
would be the owner for the property and would 
receive money from the fund as an investment.

I'm not convinced that that's a sensible way of doing 
things.  It looks to me that if you want to buy 
property as a means of creating a pension you can't 
avail of the tax breaks that are there if you want to 
create a pension through a financial institution, or
even uing shares in a Self Administered Pension.

I wonder do the same restrictions apply to using 
funds in a Pension trust to buy shares on margin?
that would technically be borrowing.

-Richard


----------



## KMc (28 Apr 2003)

*Property & Pension*

As an aside ( From an article by Shane Whelan)

80% of Irish households own their own home (or are in the process of owning it)

An ESRI survey in 1993 on financial wealth found that 85% of an Irish persons net wealth is invested in their house, farm, or other investment property.

With the advent of financial products that exist to convert part of this capital into income, would it not be prudent financial planning to exclude property from pension planning? Or at least, Irish Property. 

Apologies if this is a bit unclear.


----------



## Liam D Ferguson (28 Apr 2003)

Hi daltonr, 

The poster on the other topic, Aidan McLoughlin is himself a pensioneer trustee and director of Financial Engineering Network.  As such, it would be very dangerous for him to arrange a dodgy pension arrangement or one which would not be approved by the Revenue Commissioners.  

Dodgy arrangements could lead to his being disbarred from acting either as a pensioneer trustee or a broker, and ones that simply won't get approved by the Revenue would lead to his having very few customers.  

I have no connection with Aidan McLoughlin or FEN.  

Regards, 

Liam


----------



## daltonr (29 Apr 2003)

*Dodgy?*

Liam,

I didn't mean to imply that I thought his proposals
were dodgy in the illegal sense.  I just meant that
it sounded like a very convoluted arrangement.
My company must set up a separate trust to manage 
the pension, and then set up a separate company 
to carry out any borowing, that's a whole lot of 
obfuscation that I'd rather do without.

It may be legal but I just think it's kind of messy.

Also, Revenue specifically rule out the idea of the trust
investing back into the company which established it.
It's hardly too much of a leap to infer that a company
which is owned by the same people should also be
ruled out.  Perhaps there's a loophole here but it's
pretty obvious that the spirit if not the letter of the
law is that this sort of thing shouldn't be done.

I'm curious though.  Can the financial institutions
leverage the funds that customers pay into pension
plans.  Is there a reason why the rules should be different?

I know the idea of investing in property through a company has been discussed and I think the general
consensus is that it shouldn't be done, but...

Doesn't the lower rates of Corporation Tax as compared with income tax allow you to build up a Lump sum
much quicker (by paying yourself a low salary and letting
the rest build up in the company).

The company can then use this lump sum to invest,
and can borrow to acquire properties (unlike a self administered pension trust).

As long as you can get to a point where the income from investments exceeds that salary you are taking out
you can retire.  E.g. A handfull of rental properties with
mortgages cleared should be enough.

Sure, you go on paying income tax on the salary
you draw down, but you'd have to do that anyway if 
you owned the properties in your own name and were
collecting the rents directly.

Can someone point out the problem with this 
reasoning?

-Rd


----------



## aidanmcloughlin (21 May 2003)

*Self Administered schemes*

Hi Rd,

Apologies for not spotting your query sooner.

"My company must set up a separate trust to manage 
the pension, and then set up a separate company 
to carry out any borowing, that's a whole lot of 
obfuscation that I'd rather do without."

The process doesnt actually work like that. For example, you may wish to invest in UK property. A property advisor/provider in this area may identify a suitable property for investment purposes which your pension fund wishes to be a co-investor in. The property is actually bought by a company formed for this purpose and your scheme simply subscribes for shares in it. This is only one example of how such an investment might be structured. The point is much of the complexity is handled by the property provider.

"Also, Revenue specifically rule out the idea of the trust
investing back into the company which established it.
It's hardly too much of a leap to infer that a company
which is owned by the same people should also be
ruled out."

You are correct. However, as the example above illustrates, the company isnt owned by the same people. It is owned (or part owned) by the Pension fund. 

"I'm curious though. Can the financial institutions
leverage the funds that customers pay into pension
plans."

Yes. They can and do.

"Is there a reason why the rules should be different?"

No there isnt. The differences arise for historical reasons.

"I know the idea of investing in property through a company has been discussed and I think the general
consensus is that it shouldn't be done, but...
Can someone point out the problem with this 
reasoning?"

I havent copied across the full details of your question. In practice rental income in a company is taxed at 25%. If it is not distributed a further surcharge of 15% kicks in. If it is subsequently paid out as salary the company may not get a deduction for the salary. Generally a deduction of 15% of the rent is allowable. The salary will be liable to tax and PRSI at rates up to 47%.

If the company sells the property it pays CGT at 20%. If the company then distributes the balance you pay income tax and PRSI at rates up to 47%. Alternatively if you exit by liquidating the company you pay tax at 20%.

I hope this is of benefit.

Aidan


----------



## Fairfield (21 May 2003)

*surcharge*

Unless I am badly mistaken the Close Company surcharge on undistributed profits is at a rate of 20 % and not 15%.


----------

