This is best displayed using a case study.
Fred is 60, lives in England and has a pension fund of £400,000. He has no other income this year. He would like to explore his options regarding using his pension fund to purchase a buy to let property. He thinks this will be a good option for his retirement and has been looking at properties around £400,000.
If Fred takes a UFPLS from his pension fund he will receive £280,000.40 after tax. He would receive PCLS or tax free cash of £100,000 and the remaining £300,000 would be taxed at his marginal rate as follows:
|Tax rate||Amount taxed||Tax due||Total tax|
|40%||£37,501 - £150,000||£44,999.60|
|45%||£150,000 - £300,000||£67,500.00|
*Fred will lose his personal allowance as his income will be above £125,000.
The stamp duty payable on a property of £280,000 would be £12,400.
|Duty rate||Duty band||Duty due||Total stamp duty|
|3%||Less than £125,000||£3,750|
|5%||£125,000 - £250,000||£6,250|
So, from Fred’s pension fund of £400,000 he will be looking at properties around the value of £267,600 rather than £400,000 taking into account the income tax and stamp duty he will need to pay.
Fred has lost one third of his fund through taxes and stamp duty. In addition to these costs there will be legal fees, refurbishment costs and any other costs associated with property purchase.
It should also be remembered if Fred receives any rental income this is taxed at his marginal rate. If he receives any rental income in the same tax year as taking the UFLPS, this will be 45%.
Any gains made on the property will be subject to capital gains tax as this will not be Fred’s main residence.
On Fred’s death the value of any buy to let property will be included in his estate. The main residence nil rate band will not apply to a buy to let property.
It’s quite clear using a UFPLS to purchase a property should be considered carefully due to the taxes payable and other costs involved. Not only at the time of taking the UFPLS and buying the property but into the future as well.
The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.
All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.