Act while pension rules still relaxed

There has been much publicity about the relaxation of pension rules to allow residential property to be held as an investment in pension plans, which should provide a much needed boost to the buy-to-let sector.

There is no doubt that the changes will also present opportunities for mortgage advisers and IFAs to not only assist with pension advice but also to arrange mortgage facilities, as we can expect lenders to come out with products to meet this demand before the changes come in.

But are we missing a trick here? What many people seem to have overlooked is that this so called relaxation of the rules actually makes it harder for clients to purchase commercial property through their pension funds. Let me explain.

Under current rules a pension fund can borrow up to 75% of the value of a commercial property. So if you have, say, 100,000 available within your pension fund this will enable you to purchase a property for 400,000 with the aid of a mortgage of 300,000. This is a very tax efficient way of purchasing a property as it protects any increases in the property value from tax. It is often used by company directors to purchase their business premises through their pension fund and lease it back to the company.

There is the added benefit that the funds already within the pension fund can be used for the deposit rather than squeezing company cash flow or reducing personal funds. Opportunities are not, of course, restricted to just people buying their own premises and anyone wishing to invest in commercial property can take advantage of current rules.

Once the regulations change in 2006, the situation becomes much more difficult. A fund of 100,000 will then have borrowing powers of only 50,000, being 50% of the fund value. Instead of being able to purchase a property for 400,000, the fund would only be able to buy a property for 150,000.

It is clear that there is a big window of opportunity for intermediaries to advise their clients on whether to take advantage of the more relaxed rules while they still can. You should be alerting all your business clients who either already own their premises or are considering buying freehold property over the next year of the need to move quickly. Remember, commercial transactions can take months and the clock is ticking. We have time at the moment, but last minute panics are never fun!

The changes to the pension rules will undoubtedly bring longer term opportunities in the residential investment market but we would be doing our clients and ourselves a disservice if we ignored the opportunities available at present. So act now while you still can, and both you and your clients will be winners.