Still keen to put
property into a Sipp

I had intended investing in buy-to-let property via my self-invested personal pension (Sipp) until this was forbidden. I have heard that an alternative route now exists through listed funds that invest in residential property, so it’s an indirect investment. Is this the case and if so can you give me information about these funds and how one should invest?

The rules on investing in residential property in Sipps are quite complicated, according to Patrick Connolly, certified financial planner at JS&P. He outlines the basics: “Residential property investments will be allowed through ‘genuinely diverse commercial vehicles’ or indirect investments. This will include UK real estate investment trusts (Reits), collective property funds such as unit trusts and syndicates of 11 or more individuals.”

Syndicates are expected to attract a lot
of interest from Sipp investors, but Connolly warns of restrictions: “The value of assets in the syndicate must be at least £1m or three properties. A Sipp can own
no more than 10 per cent, and the reason for the investment can’t be to enable a member or connected person to use the property.”

These guidelines are expected to become law in the Finance Act 2006. Connolly suggests you wait until this is finalised before you invest, and even then there should be no great rush. More exciting news is expected in future, especially with the launch of Reits early in 2007.

“It is also important that, before proceeding, you consider the pros and
cons of investing in residential property
and what allocation you should give to it within your overall asset allocation strategy.”

Some fee-based advice would help you to develop an effective asset allocation for your Sipp and wider investments, and a fee-based planner would also have access to a full range of residential property investments (such as small syndicates) which you, as an individual, might well find hard to access. Find a certified financial planner via www.financialplanning.org.uk.

Will sale of O2 shares mean a loss or a gain?

My holding of O2 shares came via the BT/mmO2 split. The payout from the Telefónica takeover may leave me with a capital gains tax (CGT) liability even though I would show an overall loss if I sold my BT shares. Can you tell me the proportion of my original British Telecom costs attributable to the mmO2/O2 holding? BT and mmO2 were issued in equal numbers but their values differed widely at the time – although they became of almost equal value of late.

Ian Luder, private client services partner at Grant Thornton, outlines the background to the mmO2 split: “In November 2001, mmO2 was demerged from BT and shareholders received one share in mmO2 for each share they held in BT. For CGT purposes, the cost of each share in BT, if the holding was acquired before April 5 1998, was apportioned between each new mmO2 share and each BT share.

“This split was made on the basis of the market value of the new shares on the first day of trading (November 19, 2001) and is not adjusted by any subsequent movement in the respective share prices.”

The apportionment made was 77.544 per cent to your holding of BT shares and 22.456 per cent to your mmO2 shares.

Luder says: “It is indeed possible that your O2 shares, as they became, were sold to Telefónica at an amount in excess of the apportioned cost, while the BT shares would realise a loss, if sold at the current price.”

He comments that perhaps the only consolation for you is that you will be entitled to taper relief on the sale of your O2 shares, based on the period since you owned your BT Group shares (or, if later, since April 6 1998).

US property scheme not recognised in UK

I have several properties in Florida and am trying to sell one of them. In the US the profit can be rolled over and is not taxed if you buy a similar property within 180 days. Is this scheme (scheme 1031) recognised by HM Revenue & Customs here? Will I have to pay CGT in the UK if I sell?

In the US the gain is not taxed because the transaction is an exchange not a sale, as at no point do I receive any money (all the cash is held in escrow).

Patricia Mock, private client partner at Deloitte, says there is no equivalent of this scheme in the UK. “Assuming you are resident and domiciled in the UK for tax purposes you will be subject to UK CGT when you sell the first property, unless it is your principal private residence or has been nominated as such for UK purposes.

“The amount of chargeable gain should be reduced by taper relief, and the reduction will depend on how long you have owned the property and what it is used for.”

Mock says you should in theory be able to get credit for any US tax paid when your UK tax becomes due, although she warns: “You may actually need to pay your UK CGT in full and claim a refund when you actually pay US tax.

“However, you should take advice on this as, given the timing discrepancy between the two taxable events, there is a risk you might run out of time to claim a foreign tax credit in the UK for the US tax when the US tax becomes due. There may well be a risk of double taxation.

“In addition, you should consider the impact of exchange rates, as your sterling gain may be greater or less than your US dollar gain.”

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