Property Guides and Information for the Costa del Sol, Spain

SIPPS: How loud must the bells ring

Robin Ali \ Prosperitas International

Spain, property, investment, retire, retirement, pension, SIPPS, buy

The inexperienced, the unregulated and the unqualified are rushing to persuade clients to use their pension to buy property abroad. From his base in Spain, Robin Ali sounds warning bells that no adviser should dare ignore.

What’s behind it all?

Without exception anyone reading this article will be aware that under the new pension regime residential property will become an acceptable investment for a pension fund. In the UK there has been much talk of the opportunities this may present, particularly to those interested in the buy to let sector. However, there is also much hype about using your pension fund to buy property abroad. We all know that developers and promoters of overseas properties operate with high marketing costs and exact high commissions. For some of them, this opportunity has become manna from heaven. I am surprised at how long it has taken to catch on in Spain, but catching on it certainly is. One large chain of real estate agents is heavily advertising “40% gain on apartments in 2 weeks…guaranteed!” It doesn’t take a genius to understand what they are getting at.

What’s the problem?

The prospect of getting 40% tax relief on a contribution to a pension plan which you then use to buy a property abroad sounds irresistible. My concern is that to some, proceeding without proper advice, it may seem too irresistible. The outcome hardly bears thinking about. At a seminar we hosted in Marbella in mid September we were fortunate to have the Managing Director of a prominent UK SIPP provider present to talk to clients about the situation. The main problems are both legal and fiscal. The rest of this article will focus on the position in Spain but the potential problems transfer to other countries such as Bulgaria, Croatia, Turkey and others that are all being heavily promoted.

Trusts

The concept of trust law is founded on the common law of equity, which is, if you like, the law of what is fair or equitable. You will find this aspect of law in common law countries such as the UK, United States, Australia and other countries whose law derives from the English system. Civil code countries such as Spain, France and others do not have this concept. Because of this, trustees, as legal persons, are not recognised. Further, a Hague Convention on the international recognition of trusts was not adopted by many of these countries. The situation then is that a trust cannot hold legal title to property in such countries. In short, your pension trust cannot be used to buy property in these countries.

Use of offshore ownership structures

It is perfectly possible for a trust to establish a company which in turn holds title to the property abroad. A company is recognised as a legal person and could therefore own the property. The disadvantage here is that many countries impose an annual tax on such companies. In Spain it is 3% per year. Obviously, a big drag on annual asset growth. There are also capital gains tax issues to address, not to mention the running costs of such structures.

What about a trustee company?

• Capital gains tax


• Corporation tax


• Inheritance tax


• Wealth tax


• Annual tax on offshore property owning companies.

I remain yet to be convinced by any SIPP provider that these taxes can be avoided. Even though some have taken legal opinion from Spanish lawyers, I do not believe that all of the right questions have yet been asked. This begs the question, why do it in the first place? A UK pension is supposed to be a (largely) tax exempt structure so why have property owning structures within it that suffer tax?

The 40% guaranteed return!

Personally, I think the FSA should be investigating who is behind the advice being given to potential purchasers of overseas property. It can’t be the real estate agent as they know little or nothing about UK pension law (simplified or not!). It suggests, therefore that there are others involved in the “advice” process. Who are they? Are they regulated? If so, where are they regulated? What are their motives? Dare I suggest commissions from promoters and agents? So, will everyone get a 40% return? Of course not! Firstly, one of two things will have to happen for someone to have a fund big enough to effect a purchase. Either they will have to make a contribution to create or increase their fund as well as possibly borrow. Otherwise, they will need to restructure their existing portfolio to realise the capital necessary for the purchase (again with the possibility of borrowing).

In the first case, the extent of the tax relief will depend on the degree to which someone is already suffering tax at 40%. In the second case, they have already had the relief!

Personal taxes

It is all very well for a SIPP provider to say “We have consulted with our Spanish lawyers and they have confirmed that the pension trustee company will be exempted from, or treated favourably, in respect of Spanish taxes on companies” but what about personal taxes?

As an example, and as was asked by a member of our audience in Marbella, “If a Spanish tax resident pensionholder dies and the pension trustee company liquidates the fund to pay it to a surviving spouse, how will that be treated for Spanish inheritance tax?” Don’t forget, Spain does not recognise trusts and the payment itself is essentially coming from a company to an individual. Does that make it a gift? If so, does Spanish gift tax apply? This is only one of many more questions that need to be thought of in the first place and then resolved. I believe we have a long way to go before all the questions are raised and then resolved.

Practicalities

• The high transaction costs in buying property. In Spain, typically 10%-11%
• Benefit in kind tax charge or pay rent if the policyholder uses it?
• Who will manage the property? (Don’t forget the client won’t own it)
• Can the pensionholder kiss goodbye to 75% of his capital? (Only 25% can be used as tax free cash)
• Can he wait until age 55 to get it?
• Running costs of the ownership structure
• Can the client afford or have the scope to make a large contribution?
• Diversification: why not just invest in a residential property fund!

Robin Ali is Managing Director of Prosperitas International SL a Spanish registered company providing financial lifestyle planning for the English speaking communities of Spain. To Contact Robin Click Here

October 9, 2005 | Category: Pensions, Property and Retiring to the Costa del Sol