The Irish love affair with property is no secret. So, it is no surprise that the prospect of buying a property through a pension might be appealing to some. So how would you go about it and what should you be aware of before you do?
Why Invest in Pension Property?
One of the main benefits of investing in pension property is the tax shield provided by the pension structure.
- Properties purchased outside of a pension scheme are taxed heavily with stamp duty, local property tax, income tax and capital gains tax (CGT), all applying to the same asset. All rental income, less some tax-deductible expenses, is added to the property owner’s other income and taxed at their top tax rate, which includes USC and PRSI. CGT of 33% is levied on any capital appreciation. This punitive taxation system is one of the main reasons why so many landlords are leaving the market.
- The taxation of property in a pension is less complex, firstly tax relief is granted when funds are contributed to the pension scheme.
- Properties purchased in a pension are liable to local property tax and stamp duty as normal, however there is no income tax on rental yield and no CGT on any increase in value when the property is sold.
If an investor is looking to earn rental income from a property in retirement, the income tax exemption is only available for property held in a pension. Furthermore, you cannot claim pensions tax relief on the money used to purchase a property outright personally unlike property bought through a pension scheme.
Let us look the potential financial advantage of buying a property through a pension scheme rather than outright and where it is sold after 15 years and based on the following assumptions:
| Property Purchase Price | €200,000 |
| Property Value Increase | 5% p.a. |
| Rental Yield | 6% p.a. |
| Individuals Income Tax Rate | 52% (income tax, PRSI, USC) |
| Capital Gains Tax Rate | 33% |
Property purchased through a pension scheme:
| Income Tax on Rent | n/a |
| Capital Gains Tax on Sale | n/a |
| Value If sold after 15 Years | Circa €763,000 |
Property bought outright, rather than through a pension scheme:
| Income Tax on Rent | 52% |
| Capital Gains Tax on Property Sale | 33% |
| Value If Sold After 15 Years | Circa €441,000 |
This means that the property would generate an additional €322,000 for the property bought and sold in a pension versus bought and sold outright. The difference is largely due to the income tax liability on rental income earned on the property that was bought outright (rather than through the pension scheme) and the gain in the growth of the value of the property being subject to CGT.
It is important to note that the property does not have to be sold at retirement. Many pensioners move the property into a post-retirement product and continue to live off the rental income until they pass away. This allows them to receive a similar type of income to the traditional pension annuity, while crucially preserving a capital value to pass to their estate. Income tax will apply on funds drawn from the pension post-retirement. Retirees are entitled to a significant tax-free lump sum, typically 25% of the fund, this lump sum can go as high as €200,000 currently before any tax is payable on it.
Caveats: restrictions, costs and so on
Know what kind of rental yields you would expect from the property you are considering buying through a pension scheme. Rental yields can indicate what kind of investment growth you can expect after expenses such as Local Property Tax (LPT), property management fees, insurance and so on are paid.
Be sure you meet all the rules so that you get the tax advantages. For example, the property can’t be used by or rented to you, or anyone connected to you – such as a family member. You cannot buy a property with a view to ‘flipping’ it – that is, for renovation and a quick resale. You must be buying the property as a long-term investment.
Investing in property through a pension scheme can be expensive so understand the costs. As well as the initial cost of purchasing the property, costs include stamp duty, solicitor fees, insurance, local property tax, letting agent fees and service charges. These costs will vary depending on the type of property you purchase. Note that any costs in connection with the property purchase are consumed by the pension fund.
Be careful about borrowing for property through a pension scheme. Be sure your pension fund can afford the mortgage repayments should you decide to do so. Property is an illiquid asset.
Despite these potential drawbacks, pension property remains an attractive investment option as part of a diversified investment approach for many Irish investors. The ability to generate a steady income stream from rental payments, combined with the potential tax benefits offered for property investments, make this a viable addition to traditional investment portfolios.
In conclusion, pension property is an investment option that should be carefully considered in the context of an individual’s financial goals and circumstances.
For more information, please contact Ronan McGarrity; rmcgarrity@mavenfinancial.ie.
