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In
recent times, linking pensions to borrowings for property purchase
has become very popular. One way of arranging such a link is
through Tax-Efficient Mortgage arrangements,
otherwise
known as Pension Backed Mortgages. Under this arrangement, you pay
only interest to the mortgage provider and you use the money
accumulated within your pension scheme to repay the loan amount
when you retire. Tax-Efficient Mortgages are particularly
attractive for ‘buy-tolet’
residential mortgage situations and commercial mortgage
situations. In fact, they can be used by business people to
purchase the property from which they operate their business.
They are
available to:
•
Self-employed individuals.
•
Employees whose employers do not provide them with an
occupational pension scheme.
•
Proprietary directors.
•
Employees who make additional voluntary contributions to their
occupational pension schemes.
The main
attractions of Tax-Efficient Mortgages are:
1.
Tax-free lump sum at
retirement – can
be used to repay the entire loan or part of it, depending on the
amount of the lump sum and the loan amount involved.
2.
Tax relief on
capital repayments
– because pension
contributions are fully allowable against income tax, subject to
certain limits, you are in effect gaining tax
relief
on your capital repayments relating to the element of the loan
repaid from your tax-free lump sum.
3.
Maximisation of the
relief on interest payments
– interest payments and
interest relief remain constant throughout the loan term. They
do not reduce as with Annuity Mortgages.
4.
Tax-exempt
investment growth in pension funds
–potentially higher
investment returns.
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