One of the most tax efficient ways to purchase a property (residential or commercial) in Ireland is to get your pension to buy it.
Provided you have the funds in place or you and your company can move funds into a pension structure the property can be purchased, renovated, rented and sold in an extremely tax efficient way.
Key Tax Benefits
- An Employer or company can move money from the business to a pension fund tax free
- Rental Income paid to the pension fund is NOT subject to tax
- Legal costs, property maintenance, repair and agency fees can all be paid for by the pension fund.
- The cash (rental income) in the pension fund can be invested and grow tax free.
- The property when sold is NOT liable to Capital Gains Tax (CGT)
- When the property is sold and the pension is retired (from Age 50+) 25% of the fund is paid out tax efficiently. The remaining 75% can be invested in an Approved Retirement Fund (ARF) where investment growth is tax free.
- If you die before the property is sold or the pension is retired your spouse can inherit the full value of the pension fund tax free.
- If you die after retirement but before you sell the property then the full pension can be transferred to your spouse.
So how does it work?
Step 1 – Find a property to purchase.
Step 2 – Set up the Pension structure to facilitate the purchase using either a Personal Retirement Savings Account (PRSA) or a Small Self-Administered Pension (SSAP) Scheme.
Step 3 – Make contributions (as an Employee and/or from your Company) and/or transfer your existing pension funds to the scheme.
Step 4 – Your new pension buys the property (with money that has never been taxed!). You can also use the funds in your pension to make repairs or improvements to the property rather than have to pay from your own taxed income.
Step 5 – Property is rented with the (tax free!) rental income directed in to your pension bank account.
At Retirement (Age 50+) you can sell the property and retire the pension. Under current pension regulations you can take 25% (up to a maximum limit of €200,000) of the value of the sale plus the rental income tax free.
If you don’t want to sell the property but want to retire the pension you can still take out up to 25% of the cash in the bank account tax free. At that point the pension structure that the property is in will simply transfer from a PRSA/SSAP to a post-retirement structure called an Approved Retirement Fund (ARF).
When you do eventually sell the property there is no Capital Gains Tax to be paid!
Important Points To Note
- The property has to be “at arm’s length” between you and the tenant. You cannot rent the property to a family member, colleague, employee or connected party.
- The vendor cannot be a family member, colleague, employee or connected party.
- The rental of the property has to be done using a property agent listed on the pension provider’s register and the property must be registered with the RTB.
- Investing your full pension in one asset class, in one property location is considered a high risk investment particularly if you need to sell the asset at a time when property prices or rental yields are not favourable.
- In certain circumstances borrowing through the pension fund may be permitted to purchase the property. This is not something I would generally recommend as it would increase the investment risk of the asset.
Like all aspects of Retirement Planning, when considering buying property through your pension it is vital that you get impartial financial advice from a regulated adviser who will assess your options and make a recommendation that is appropriate and unique to your needs.
If you’re looking to buy a property with a pension contact Daragh Coleman from Coleman Financial Planning on 01 5313711 or dcoleman@colemanfinancialplanning.ie