Bonus for UK Investors and SA Expatriates

Hundreds of thousands of South Africans living in Britain are able to buy SA property at discounts of up to 40% since new tax laws become effective from 6 April 2006.

Changes to British legislation will allow them to own tax-free pension funds – known as Sipps (for self-invested personal pensions) – with which to invest in SA property, among other assets, such as paintings and wine.

Any cash that a person paying British tax puts into a Sipp will be tax-deductible and taxpayers can put all their income each year into their Sipps.

A young South African earning £50 000 (R550 000) a year will be able to put all of it into buying an SA property. The British government will then rebate the tax paid – around 40% or £20 000 (R220 000) at that income.

A R550 000 house in Port Elizabeth for instance will end up costing the taxpayer R330 000. Even at the lowest tax rate of 18%, it would cost R449 000.

The Sipp will also be able to borrow up to 50% of its asset value, so the taxpayer could effectively buy properties worth R1,1 million with a R550 000 mortgage and pay it off with future income, all of it tax-deductible. Additionally, all rent earned from the property will be tax-free.

If he or she returns to SA, the tax-payer will have a tax-sheltered offshore trust through which he can continue to build an investment portfolio until he turns 50 (before 2010) or 55 (after 2010). Beneficiaries will be able to draw income from the fund before reaching that age. However, the income will be taxable.

A group of friends or family members will be able to combine their money in a group Sipp. Or a group of Sipps will be able to invest in one property.

An estimated 750 000 South Africans live in London alone. Many of them are in their 20’s and 30’s and have come to Britain to save in hard currency. Some want to accumulate capital for when they return to SA. Despite a soft property market in the UK, they tend to continue to be interested in investing in SA property.

The pattern is that young South Africans stay in London for about five years, saving as much money as they can. Then, usually under pressure from their partners, they either move out of London and stay in Britain or return to SA with some capital to kickstart a future at home.

Most know little about property or investment and put their savings into low-interest bank accounts. A growing number, are putting their savings into properties back home and this is an ideal opportunity for them. The new flexibility of Sipps gives them a way to boost their earnings by making them tax -free and to buy SA properties at a large effective discount.

The law is being changed because the British government, like other authorities in the developed world, is worried about the burden of supporting hundreds of millions of pensioners who won’t have enough money to live on.

Australia was the first country to have personal pensions and up to 40% of Australian property mortgages have been granted to them. The US is also exploring personal pensions. Who knows what the now left wing inclined SA government will do despite undoubtedly come under pressure to launch them, too.