Property and Pensions:Many investors have become extremely disenchanted with the "packaged" pensions offered by large insurance companies and are looking for the type of control, cost savings and transparency that Self Directed Pension Scheme can provide.
Private pension trusts are now available to everyone and provide a much greater choice of investment than can normally be offered by a "packaged pension". They also include the option to buy commercial and residential property and borrow money (within certain limits), which gears the potential return.
This type of product is especially well suited to Company Directors.
The following outlines what Self Directed Pension Trusts are, how they operate and the key benefits.
- The transfer of money from a company into a Trust will not result in a personal tax liability for the individual company director.
- The individual is the sole beneficiary of the Trust.
- The assets of the Trust cannot be accessed by creditors in the event of company failure.
- Current profits and retained earnings in the company can be transferred into the Trust for the benefit of the director.
- The Trust can invest in areas of personal interest to the director including property, private companies, equities, gilts, tracker bonds, deposits, investment funds, etc.
- Investments can grow free of Income Tax and Capital Gains Tax.
- The involvement of the director in the management of the Trust depends entirely on the level of personal interest. It can be a hands-on or hands-off arrangement. Investment expertise is not necessary.
- Benefits can be drawn directly from the Trust at retirement commencing at age 50.
- 1. Funds can be accessed:
- At age 60
- At age 50 (if you retire)
- At any age (if you retire due to ill-health)
- On Death
- 2. In each case some or all of the Fund can be taken as a Tax Free Lump Sum. This amounts to:
- 1.5 times salary on retirement or
- 25% of the Fund if you choose your Proprietary Director options (see below).
- 4 times salary on death.
- 3. The balance of the Fund (if any) can be used in one or more of the following ways
- Full encashment, subject to tax at marginal rates (not available on death)
- Annuity Purchase
- Transfer to an ARF (Approved Retirement Fund (see below).
Under your Proprietary Director options, a transfer to an ARF is not taxable. Profits and Gains of the ARF are not taxable. Withdrawals from the ARF will be subject to Income Tax. This is collected under the PAYE system. An ARF inherited by children over 21 will be exempt from Inheritance Tax but is subject to PAYE at the standard rate. An ARF inherited by children under 21 is exempt from Income Tax but is potentially liable to Inheritance Tax.
Click here for Maximum Funding - Illustrative Table
This table illustrates the amount that can be paid on a level contribution basis (expressed as a % of initial salary).
Investment criteria: One of the key benefits of a Self-Directed Pension Trust is its ability to invest in real property. The Revenue Commissioners have introduced some criteria that specifically apply to property investment:
- The vendor must be at arms length from the scheme and the employer including its directors and associated companies.
- The purpose of the acquisition is not for disposal or letting to the employer, including its directors and associated companies
- The scheme must have sufficient liquid investments to meet its liabilities
- The acquisition and development of a property with a view to its disposal is not regarded as a tax exempt scheme investment.
- The acquisition of property for personal use (rather than for investment purposes) is prohibited.
Once these criteria are satisfied a scheme can invest in any type of property based anywhere in the world. This can include residential, office and industrial buildings.
Investment Procedure: A solicitor is identified to handle the transaction on behalf of the Self-Directed Trust. The funds necessary to finalise the purchase are transferred from the Trust Bank Account to the solicitors' client account to permit the discharge of the initial deposit and the balance of the purchase monies.
The initial contract can be signed by any Trustee (in trust) on behalf of the Trust. The formal transfer of title will be signed by all Trustees. The title to the property will be in the joint names of the Trustees. It can also state that it is held on behalf of the relevant Trust.
The stamp duty and legal fees can be paid by the Trust or by the employing company. Payment of fees by the employing company can allow VAT to be recovered. Payment of stamp duty by the Trust may effectively give a tax deduction on this capital item. Whilst it is technically possible for the Trust to register for VAT this route is usually only taken in practice in respect of commercial properties.
The title deeds to the property can be retained by the purchasing solicitor as custodian for the Trust. A note confirming this should be issued by the solicitor.
Expenses and Income: In some cases an agent is appointed to manage the investment property. The income from the property can be paid to the agent and expenses appropriate to the property discharged from the income. The balance should be paid to the Trust Bank Account for further investments. Details of gross income and expenditure should be provided annually by the agent for the preparation of the Trust annual report.
Revenue Criteria: The Revenue permits a Self-Directed Trust to invest in all forms of property including residential property based in Ireland and overseas. The key criterion is that the property must be used for investment purposes i.e. it can't be used by the individual for personal purposes.
The approval by the Irish Revenue of a Self -Directed Trust receives generous tax treatment in Ireland. It is exempt from all capital gains tax and income tax.
This tax treatment is also preserved in respect of UK investment as a result of the Ireland UL tax treaty. However similar exemption is not readily available in other jurisdictions such as Spain, Portugal etc. As a result tax will be payable at source. We provide advice on how the local jurisdictions we operate in.
Other Requirements: The laws and taxes of the overseas jurisdiction in which an investment is made will need to be complied with. In this context therefore it will be necessary for the investment by this Self-Directed Trust to be structured in such a way as to ensure that all criteria are complied with and that the trustees are protected from any obligations that might arise in this regard. In this context therefore it is usual to see a company used for the purposes of effecting the investment in the foreign jurisdiction i.e. the pension fund invests in a company (usually based outside Ireland) which in turn purchases the property overseas. Thus the asset of the pension fund will be the shares in the company.
This arrangement offers the following benefits:
- The Trustees are protected from direct exposure to the tax and legal impositions in the local jurisdiction.
- The complexity of dealing with a trust in jurisdictions which do not recognize trusts is avoided.
- Legal and taxation implications in relation to succession and death duties in those overseas jurisdictions will also be avoided.
It should be noted that the benefits of the company structure are something that must be ascertained in each circumstance as changes in legislation and differences between jurisdictions will alter the impact of the structure.
One advantage that can flow from the use of the corporate structure will be the possibility that the overseas company can utilize borrowing to assist in the property purchase, the appropriateness of going this route is a matter for the professional advisers to the trust
Trustee Requirements: Where it is proposed to purchase property on behalf of a Self-directed Trust it is necessary that a solicitor is appointed in Ireland who will advise the trust in relation to the proper acquisition of title and other financial and legal matters arising from the purchase. Also all funds for investment in the property (or in the overseas company) will be transferred through the solicitor and moved onwards on the direction of that solicitor.
The trustees are required to have joint signing authority on the trust accounts and it is also appropriate that they would have similar authority in relation to the company's bank.
Suitable arrangements would need to be put in place in relation to the maintenance and operation of the property, the maintenance and discharge of fiscal and legal obligations in relation to the property, and the title to the property.
The costs of the structures can ultimately be borne by the trust as they are incurred on behalf of the trust. This includes the fees of the relevant advisors, which should be confirmed in advance.
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