The top 4 tax benefits of a SIPP

Qandor member and director of Burlington Wealth Management, George Ttouli explains what SIPP is and why you should invest in it.

A  SIPP (Self-Invested Personal Pension) is a type of personal pension plan that is very flexible. It is also very tax efficient, allowing you to control the investments you make. The investments can include commercial property. 

“I don’t need a pension, I make money investing in property”. I have probably heard this comment hundreds of times over the years and fully understand. Whilst a SIPP is not suitable for everyone, those who just dismiss the idea are missing the tremendous tax advantages available. 

Tax relief on contributions paid in 

Contributions can be made by an employer, and this employer can claim the contribution as a business expense. This reduces the employer’s gross profit and therefore there is a tax saving aspect for the employer. 

If the employer is a limited company, it will reduce the Corporation Tax liability. Many property developers operate using a limited company and they may be on the payroll to receive salary and/or dividends. This is an example where funds can be invested directly from the trading company to the pension.  

If contributions are made by an individual, they will obtain tax relief at their highest marginal rate. So, paying into a SIPP reduces your tax. Up to 45% Income tax relief for an individual contribution or 19% Corporation tax relief for a limited company contribution.

Growth free from Capital Gains Tax

All chosen investments in a SIPP are not subject to Capital Gains Tax. This includes investments in shares, collective investment funds like unit trusts or even commercial property. We have clients where they have purchased a commercial property and operate their businesses from this property. 

The property is owned by their SIPP and in the future, when the property is sold, any capital gain is not subject to Capital Gains Tax. Tax-free growth when investing must not be underestimated.

Up to 25% of the fund tax free when benefits are drawn

At any age from 55 an individual can draw money from a pension and can take up to 25% of the value of the fund tax free. Having access to 25% of the fund from age 55 is a very useful benefit: there is no tax to pay on this portion of the fund regardless of an individual’s income tax position.

You could be an additional rate income taxpayer and in the same tax year, if you are over the minimum age, you can draw up to 25% of your pension fund completely free of tax. 

Inheritance tax-free

On death, the value of your SIPP is outside of your personal estate – therefore, there can be substantial Inheritance tax savings. With appropriate financial advice, a Trust can be created to receive death benefits from a pension, and you can appoint who your trustees would be to manage your pension fund after you have passed away. 

So, in a nutshell, saving in a SIPP reduces your Income tax or Corporation tax. Along the way, the investment can grow free from Capital Gains Tax. At the age of 55, you can draw up to 25% of the fund tax free and, on death, whatever the value of your pension fund is remaining, it will not form part of your estate and therefore will not be taxed under Inheritance tax.

For an informal discussion on how a pension can be used in your financial planning alongside a property development business or a property investment business, please feel free to get in touch.

I am happy to review all of your existing pension arrangements without a fee or obligation and make sure all the T’s have been crossed and I’s dotted.  If you have any questions relating to any type of  pension, please feel free to contact me any time on (07721) 518394 or email me directly george@burlington.uk.net

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