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Property in your Pension

I hope you found last month’s article beneficial, where I went through the changes made over the last few years and the difference of allowing directors to pay into their PRSA pensions without BIK. Email us if you do not have a copy.

This month we look at the change as a way of allowing directors and business owners to invest once again in property-based pensions. Due to European Company Law, it has been very difficult for several years for directors to directly purchase property and place it into their pension. However, PRSAs are
a personal product and the same EU company laws don’t apply.

I will give two examples showing the difference between putting an active income (rent) into a tax-free
environment, and having funds in a normal fund-based PRSA. These are based on a large payment from your company into your pension for eight years, but this does not mean that you need to start your pension at these levels, rather they are there to show how a fully funded pension would work.

Let’s use Joe as a test case. Joe turned 40 in January and is going to pay €10,000 per month into his pension for eight years. We generally like to build a fund of €1 million before purchasing property,
therefore both examples are the same for the first eight years, ie €120,000 paid in per year
for eight years. To keep this comparison simple, we have used growth rates for the fund based PRSA as 4% per year with a total fund management charge of 1% per year. This applies to both examples for the first eight years. We also take an income in retirement of €100,000 increased by 2% per year from
both examples.

Example 1

In Example 1, the dark blue graph shows the payments made into the fund for the eight years.
The light blue graph is as follows:

  1. Property values increase 2% per year
  2. Rental yield Gross 6% (We take 80% of the rent to be the net rent going into the pension, allowing for property management, insurances and maintenance.)
  3. Rental growth is projected at 2% per year. Dark green is your 25% of the fund taken at retirement – value €660,000 (Tax Efficient Cash) Light green is your fund after retirement, taking income of
    €100,000 per year increasing at 2% per year.

As the illustration shows, the rent is effectively continuing to pay into the pension even though you are no longer paying in directly. As the property value and rent grows over time the fund continues to
grow. When you take your 25% (Approx €660,000) and then €100,000 per year you can see that the income you are taking is being replaced by the rent still coming into the fund. If you pass away as a 90-year-old you will leave approximately €2 million in your fund. When you die, the properties are sold
by the fund and the money distributed to your estate, to your spouse within the fund and later to your children, at a flat tax of 30% but with no inheritance tax. If you pass away before retirement the entire
amount is paid tax free to your spouse.

In Example 2 we apply the same returns as we did to the other fund, with the main exception being that

Example 2

there is no rent. We continue to apply the 4% growth rate throughout the life of the fund. Again, as above, we pay into this fund for eight years at €120,000 per year and we then stop paying into the
fund. We also take €100,000 per year as income in retirement, increased by 2% a year.

  • Dark blue signifies the steep growth where the pension is being paid into.
  • Light blues hows growth at 4% per year on the value in the fund.
  • Dark green represents 25% from the fund at retirement value of €403,000 (Tax Efficient Cash)
  • Light green is your fund after retirement, taking €100,000 per year increasing at 2% per year.

As the graph shows, your pension will run out of funds in your mid-eighties. It is very important to note that this is just an example; it is not a forecast. We have used a few assumptions in making these graphs. Growth in the fund-based PRSA is at 4% per year, but this may be less as the value of funds can fall as well as rise.

In both funds you have paid in the same amount, so the difference is the active income. Rental income is difficult to manage personally (tax at up to 52%) or in a company as you have layers of tax. However, in the pension you have zero tax on the gain in property value, zero tax on the rent and zero tax to put the funds into the pension in the first place.

This article shows how a property-based pension might work, but like all things this is a risk investment. Property in ten years time might not be the investment it seems to be today and may very well be worth less. We assume that the Pension owner stays invested in property for the full term, but this is a high-risk product as the value of property and/or rent can go down as well as up. In the event that a director decides that they want to exit property in their PRSA, there is nothing to stop them from instructing the broker/trustee to put the properties up for sale.

Arm’s length rules apply here. You can’t sell to a connected party and you must use an auctioneer to sell the property on the open market. This is a self-administered product and you are taking the risk that any property you decide to purchase is a good and viable property.

Our recommendation is that a scheme should own 100% of a property, and not a share, or part, of an investment property. A small multi-unit building in a good rental area is usually a viable target for your pension fund.

When you take the fact that you paid no tax on the money you put in to the scheme to get it up and running, and no tax on the rent or the capital gain, it is one of the most effective compounding investments available.

At MoneyTree we have the right agencies and authorisations to help directors take advantage of this pension opportunity, so why not give us a call. We can see where your existing pension planning is now, and if we can combine that with more funding to position you to take advantage of this over the next several years.

Or, if you have no pension planning at all, we can help you to set up and get you started in a normal PRSA fund. This is a great starting point for any director to create their own pension experience.

Warning: These figures are estimates only. They are not a reliable guide to the future performance of your investment.

Warning: The value of your investment may go down as well as up. You may get back less than you invest

Derelict House Grant

A grant of up to a maximum of €30,000 will be available for the refurbishment of vacant properties for occupation as a principal private residence, including the conversion of a property which has not been used as residential heretofore. This will be subject to upper limits for the types of work specified below having regard to a reasonable cost assessment by the local authority. The grant is inclusive of VAT cost of the works.

Where the refurbishment costs are expected to exceed the standard grant of up to €30,000, a maximum top-up grant amount of up to €20,000 will be available where the property is confirmed by the applicant to be derelict (i.e. structurally unsound and dangerous) bringing the total grant available for a derelict property up to a maximum of €50,000   Click here for details https://www.gov.ie/en/publication/c2183-croi-conaithe-towns-fund/

First Home Scheme

The Government of Ireland (Department of Housing, Local Government and Heritage), in partnership with Participating Lenders, has introduced a Shared Equity Scheme to help you bridge the gap between your deposit and mortgage, and the price of your new home.

Revised Help to Buy Scheme opens

Who can claim the Help to Buy (HTB) incentive?

To claim HTB, you must:
  • be a first-time buyer
  • buy or build a new property between 19 July 2016 and 31 December 2021
  • live in the property as your main home for five years after you buy or build it
  • be tax compliant, if you are self-assessed you must also have tax clearance.
To qualify, you must not have previously bought or built a house or apartment, either on your own or jointly with any other person. If you are buying or building the new property with other people, they must also be first-time buyers. If you have inherited or been gifted a property it will not affect your eligibility. If you are buying the property, you must have signed a contract to buy that property on or after 19 July 2016. If you are self-building, you must have drawn down the first part of the mortgage on or after that date.

Approved developers and contractors

The contractor you are purchasing your home from must be approved by Revenue. You can check the list of approved developers and contractors to make sure that your developer or contractor is approved. [su_accordion][su_spoiler title=”What type of property qualifies? ” open=”no” style=”default” icon=”plus” anchor=”” class=””] To qualify for HTB, the property that you build or buy must be:
  • your home
  • newly built with the construction subject to Value Added Tax (VAT) in Ireland.
The property must never have been used, or have been suitable to use, as a residential home. If the property was non-residential, but has been converted for residential use, it may qualify for HTB. If you buy or build the property as an investment, it does not qualify for HTB. Purchase value The purchase value of a new build means the price that you bought it for. For self-built property, the purchase value is the approved valuation by the lender at the time that you took out the mortgage. If you bought the property between 19 July 2016 and 31 December 2016, the purchase price must be €600,000 or less. If you bought it after 1 January 2017, it must be €500,000 or less. Mortgage You must take out your mortgage on the property with a qualifying lender. This loan must be used only for buying or building the property. The loan must be at least 70% of the purchase value of the property. This is known as the loan to value ratio. You are allowed to have a guarantor on the loan. [/su_spoiler] [su_spoiler title=”How much can you claim?” open=”no” style=”default” icon=”plus” anchor=”” class=””] The amount that you can claim is the lesser of:
  • €20,000 (increased to €30,000 for enhanced relief)
  • 5% of the purchase price of a new home. For self-builds this is 5% of the completion value of the property. This is increased to 10% for enhanced relief.
  • the amount of Income Tax and Deposit Interest Retention Tax (DIRT) you have paid for the four years before your purchase or self-build.
The maximum payment is €20,000 per property (increased to €30,000 for enhanced relief). This cap applies regardless of how many people enter into a contract to buy a house. Universal Social Charge (USC) or Pay Related Social Insurance (PRSI) are not taken into account when calculating how much you can claim. Enhanced Help to Buy Scheme As part of the Government’s July Jobs Stimulus package a temporary enhanced HTB incentive was introduced.  During the period from 23 July 2020 to 31 December 2020, applicants will be eligible for increased relief if they:
    • sign a contract for the purchase of a new house or apartment
 
  • or
 
  • make the first draw down of the mortgage in the case of a self-build property,
The maximum HTB refund is calculated at the lesser of:
  • €30,000 (up from €20,000)
  • 10% (up from 5%) of the purchase price of a new home. For self-builds this is 10% (up from 5%) of the completion value of the property.
  • the amount of Income Tax and Deposit Interest Retention Tax (DIRT) you have paid for the four years before your purchase or self-build.
Applicants that made a HTB application under the original scheme, may satisfy the enhanced HTB requirements. They should cancel their original HTB application and reapply to avail of the increased relief. For further details please see  www.revenue.ie  How will the refund be paid? If you bought or built the property between 19 July 2016 and 31 December 2016, the refund will be paid directly to you. If you buy a new build after 1 January 2017, the refund will be paid to the contractor. If you self-build the property after 1 January 2017, the refund will be paid to a bank account you hold with your loan provider. [/su_spoiler] [su_spoiler title=”What do you need to do before you apply? ” open=”no” style=”default” icon=”plus” anchor=”” class=””] Before you apply, you must be registered for either: If you pay tax through PAYE Before you apply for HTB, you must submit a Income tax Return for each year you wish to apply for a payment and pay any outstanding tax due. Use myAccount to submit an Income tax Return for the years from 2015. Online Income tax Returns are pre-populated with your pay and tax details. If you need to submit a paper Income tax return (form 12) for 2014, you can download the form and submit on paper. When you have completed this form, you can scan it and then upload it in MyEnquiries. To do this, you should:
  • click ‘Add new enquiry’
  • select ‘Help-To-Buy scheme’ from the dropdown options available under ‘My Enquiry relates to’
  • select ‘Income tax return (Form 12 2014)’ from the dropdown options available under ‘And more specifically’
  • attach the scanned pages of your Income tax Return (Form 12)
  • submit your enquiry.
If you are self-employed If you are self-assessed, you must be fully tax compliant and have tax clearance. You must have filed your income tax returns and paid all the tax that you owe for any years where you were self-employed. Use Revenue Online Service (ROS) to submit your Form 11. Four year rule You may have signed your contract to buy a new build or drew down the first part of your mortgage for a self build between 1 January and 31 March 2018. If so, you may select either the:
  • year of purchase to be the actual year you bought or built your home
  • previous year provided you make your application before 31 May 2019.
This will allow you to select the four year period which is of most benefit to you. For example, if your contract or draw-down date is 2 February 2019, you may choose whether that took place in either 2018 or 2019. If you choose 2018, this will allow you to use your Income Tax and DIRT for the four years from 2014 to 2017. If you choose 2019, you can use the years from 2015 to 2018. [/su_spoiler] [su_spoiler title=”How do you apply for Help to Buy (HTB)?” open=”no” style=”default” icon=”plus” anchor=”” class=””] Use my Account or Revenue Online Service (ROS) to apply for HTB online.  There are two stages to the online process:
  • the application stage
  • the claim stage.
Application stage You can apply as an individual, or part of a group that is buying or building a property. You must complete a declaration and select the years you want to use for a refund. If you are tax compliant, your application will be approved. You will be provided with an application number and a summary of the maximum amount you can claim. You will also be given a 6 digit access code separately through My Enquiries. Keep a safe note of both of these codes as you will need to provide them to your lender. If you are buying your home you will also need these codes for your qualifying contractor. If you are self-building you will need these codes for your solicitor. Your contractor or solicitor will require this information to verify what you have submitted. If you make a HTB application but have not yet made a claim, your application will expire on 31 December. You can then re-apply and make a new HTB application. Claim stage You can make your claim once you have either:
  • signed the contract for your home
  • drawn down the first part of the mortgage if you are self building.
Login to HTB through my Account or Revenue Online Service (ROS) and complete the following steps below. Step 1 Upload evidence of your mortgage and the following information about your application:
  • if you are buying a home: a copy of the signed contract
  • if you are building a home:
    • proof of the drawdown of the first part of the mortgage
    • A copy of the valuation report from your lender.
Step 2 You will be asked to confirm details about the:
  • property
  • purchase price
  • date of completion
  • mortgage
  • amount of deposit already paid.
If you are applying with other people you will also need to confirm the portion of the refund to be refunded to each person. If you are self-building, you will need to provide the BIC and IBAN of the loan bank account. Once you have submitted your claim you will be provided with a claim reference. Please ensure that you have carefully checked all the information you input before you sign and submit the claim.  If any of the information you have provided is incorrect, you must:
  • cancel your claim
  • submit a new claim with the correct information
This must be done before you continue to step 3. Step 3 Once you have submitted your claim you should advise your developer or contractor (or solicitor if you are self-building). Provide them with your claim reference (issued to you after step 2) and access code (issued to you when you submitted your application). Before you receive any refund, the information you have provided will need to be verified by the:
  • developer or contractor, in the case of a new build
  • Solicitor acting on your behalf, in the case of a self-build.
The refund that you finally receive is limited to 5% of the purchase price of the house. This may mean that it is different to the maximum relief amount that you were given at application stage. [/su_spoiler] [su_spoiler title=”Can Revenue claw back a refund? ” open=”no” style=”default” icon=”plus” anchor=”” class=””] Revenue can claw back refunds if:
  • you were not entitled to the refund
  • you do not live in the property for a minimum of five years
  • you did not finish the process to buy the property
  • you did not finish building the property.
Revenue can claw back refunds from the contractor if:
  • the property is not bought by you within two years from when the refund was made to the contractor
  • Revenue has reasonable grounds to believe that the property will not be bought by you within that two-year period.
There is some flexibility around the two-year period. This can apply if Revenue is satisfied that the property is either:
  • almost complete at the end of the two years
  • likely to be completed within a reasonable time period.
Once the residence is built and bought by you, you are solely responsible for meeting the conditions for the HTB refund. The developer is no longer responsible after this point. [/su_spoiler] [/su_accordion]