Focus 129 – 6 Key Property Questions
In our experience, financial advisers and their clients occasionally have concerns about putting a commercial property into their pension scheme. Below we have listed some of the most common questions that we are asked.
Q. What type of property can I purchase with my pension?
A pension scheme can invest directly into most forms of commercial property, including:
• Industrial units
• Retail units
Under no circumstances can a pension scheme directly acquire a residential property without incurring substantial tax charges.
Q: Do pension transactions take longer than a normal transaction?
Using lawyers who are familiar with the pension provider’s requirements will certainly speed up the process. Pension providers often have key issues that need to be addressed in the purchase documents, therefore having solicitors involved who are aware of such matters will remove delays caused by having to review and revise documents late in the process.
Nevertheless and as with all property transactions, solicitors will have to conduct searches and the results of these may lead to further enquiries being made which may lead to a delay in the purchase completing.
Q: The property we are looking to acquire is already owned by us. Can we still purchase this with our pension scheme?
Yes, although as HMRC would deem this to be a purchase from a connected party, the purchase price would need to be supported by a valuation undertaken by a RICS certified surveyor. Where the vendor is a connected party, we would also need the initial market rental level to be confirmed by a RICS certified surveyor.
Q: Can we borrow to assist with the purchase, and will this delay the purchase?
A SIPP or a SSAS can borrow up to 50% of its net asset value in order to assist with the purchase. It is likely that a third party lender, such as a high street bank, would wish to secure their loan against the property being purchased which would usually mean that they would require due diligence to be undertaken on the property. This can mean that the timescale for the purchase can be extended by a couple of weeks depending on their requirements. A SIPP or SSAS can also borrow from a connected party, although the transaction must be at arms-length and on commercial terms.
Q: I think I could benefit from putting property into a SSAS or SIPP, but I’m restricted from doing so because there is a residential element to the property. Is it possible to work around this?
It is sometimes possible to split the residential element of a property from the commercial, which would enable the pension scheme to only purchase the commercial element and avoid any tax charges that owning the residential would cause. The residential and freehold parts of the building will normally be held by the client, with the pension scheme acquiring a long leasehold interest in the commercial element only.
Q. Do I need to ensure that the property is insured?
Yes! A property is often one of the largest assets within a pension scheme and generates a regular income for the trustees. It is important that the trustees give careful consideration to the insurance purchased for their property, to ensure that their investment is not jeopardised in the event of an unexpected event. Taking time to review and understand your policy, presenting a clear view of all the relevant risk information including seeking appropriate guidance to avoid under insurance, will all help to ensure that it responds as trustees would hope should disaster strike.
Please contact a member of the Adviser Support Team if you have any property or general enquiries on 0115 841 5000.