In this month's issue we examine the potential effect of the new pension rules on property values. We also look at the Scottish Executive draft planning papers on green belts and town centres and the recent consultation paper published by the Scottish Executive on paying for connections to the water and sewerage networks .

News

The Scottish Executive has recently published two draft planning policy papers for Consultation.

The first paper sets out Green Belt Policy and the way in which it should be enforced. The paper takes the view that Green Belt policy should be used as a long-term land use planning tool to provide clarity on where development will and will not take place. It states that green belts should be “robustly protected” and that there should continue to be a strong presumption against development on green belts, but that where it is considered necessary, the release of Green Belt land should be taken forward as part of the long term settlement strategy in the Development Plan. Development Plans prepared by local Authorities will define the scale of land use change, identify the developments that are appropriate and indicate the standards of layout, design and other requirements that should be met. Responses to the Consultation are invited by 28 October 2005.

The second paper sets out the Executive’s policy on Town Centres and aims to emphasise the Executive’s support for town centres. It covers how to plan for town centre development and how to respond to development proposals for town centre uses. The policy is intended to establish a mix of uses including retail, leisure, entertainment and recreational uses and also community facilities, civic space, tourism and business uses. It is stated that the focus is on creating a mix of uses for town centres and that housing is an important element of that mix. However, the policy paper acknowledges that town centres are not able to accommodate all forms of retail development and the paper establishes methods for treating such proposals which it says are to be complimentary to those in town centres. The consultation period ends on 11 November 2005.

The draft policy papers are available from the Scottish Executive at:

Scottish Planning Policy 21: Green Belts - click here

Scottish Planning Policy 8: Town Centres - click here

Connecting to the System

Consultation on Paying for Connections to the Water and Sewerage networks

This consultation paper contains proposals and draft Regulations for changing the way Scottish Water contributes to the cost of new connections to its water and sewerage networks. The paper aims to clarify both Scottish Water and developers’ responsibilities for paying for a new infrastructure. In terms of the proposals developers are to be responsible for paying for the immediate connection from a property to where it joins a water main or sewer and Scottish Water are to be responsible for meeting all requirements for strategic infrastructure. The regulations also provide the basis for dividing the costs of new local infrastructure which aim to reflect the costs and benefits of that infrastructure to Scottish Water and the developer.

In terms of the division of costs, Scottish Water are to meet the costs of local infrastructure up to a limit based on the future income that the new connection will bring, and the developers are to meet any costs above that limit.

The draft regulations also seek to clarify the point at which Scottish Water makes its contribution to new connections in order to ensure money is not invested before it is required to avoid the risk to its customers’ money in situations where developments may still be delayed or cancelled.

Although the paper states the regulations will continue Scottish Water’s duty to make “significant contributions” to the costs of new connections to the public networks and provide “a transparent economic justification” for the contributions, the regulations also seek to protect existing customers in situations where the cost of new local infrastructure is “substantial”. In such situations it is seen as inappropriate for existing customers to bear the costs and developers will have to meet the costs not covered by Scottish Water’s contribution.

The Consultation Paper is available from the Scottish Executive here.

The consultation period ends on Thursday 17 November 2005.


A Flat Market

New Pension Rules

James Aitken, Property Tax Associate comments on the new pension rules which come into effect in April 2006 and their potential effect on the property market

A great deal has already been written on the subject of the new pension rules that come into force next April. The one change that has received the most publicity is the fact that a self invested personal pension or SIPP will be able to invest in residential property. How this change will affect the property market and in particular property prices has also resulted in a great deal of comment. House price increases of between 5 and 15 % have been predicted due to the greater competition for residential property between home buyers and investors.

One of the main advantages of a SIPP is that all contributions attract tax relief of 22 per cent for basic rate taxpayers and 40 percent for those on the higher rate. This means that a £100,000 property bought into a SIPP would, in effect, only cost a higher-rate taxpayer £60,000 because they would be paying £40,000 less in tax. There is also no tax to pay on rental income or on any profit (capital) from the sale of the property within the pension fund.

As with all predictions it is useful to have at least a pinch of salt handy. However, even before the HMRC guidance notes are published it is clear that there are a number of reasons why the investment of residential property will not be an option for everyone.

HMRC have been quoted as saying that putting property into a pension is only realistic for those with large pension funds. HMRC also stated that there are many limiting factors as to why for most people residential property and in particular their main residence will not be an appropriate investment.

One of these factors is the rule governing what pension funds can borrow. A SIPP can be used as a deposit for a mortgage but the home loan can be no more than 50% of the value of the pension. This means that the average pension fund in the UK of £30,000 could borrow £15,000 to purchase property, giving a total buying power of £45,000. Presently you can borrow up to 75% of the value of the pension fund to purchase commercial property. The new 50% limit applies to all property, residential and commercial, from next April.

Those seeking to make a living as a landlord may also find the rules too restrictive. The property is not owned by the investor but by the pension fund itself. Any rental income and capital gain from the sale of the property cannot be taken out of the pension fund until retirement. That will be at least age 55 by 2010. In addition, all mortgage payments and the costs of buying or selling the property must be made from the pension fund. This means that a reasonable amount of capital needs to be tied up in the scheme to meet these expenses. There are also other costs to consider. As the owner of the property, the pension trustee may also insist on a professional managing agent. I have read that this outlay is predicted to be in the region of 6-10% of the annual rent of the property. These costs come on top of the set–up and annual maintenance charges which will be imposed by the administrator of the pension. It is predicted that a SIPP containing a property will be twice as expensive as one without. This again makes this type of investment only suitable for those with generous funds that they can afford to lock away. Also if there is an increase in the number of buy-to let properties, where will all the tenants come from? The Scotsman recently reported on the over-supply of flats built specifically for the buy-to–let market.

The advantage of placing a second home or holiday home in a SIPP is clearer as presently capital gains tax is paid on the sale of these properties. As for a main residence, detailed rules on whether you have to pay rent if you make use of this type of property will hopefully be covered in the guidance notes. The fact that tax relief will also be available on non-UK property has caused a lot of controversy.

The changes and the consolidation of UK pension law are both welcome and long overdue. The effect it will have on the Scottish and indeed the UK property market is not yet clear. However, given the potential tax reliefs available it is an option that investors will not ignore.