Key considerations.
Before your clients commit to purchasing commercial property within a scheme they should consider the following:
Costs
There are several costs that need to be taken into account...
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These include solicitor costs, valuation fees, land registry fees, stamp duty land tax (for properties over £150,000), VAT (if applicable) and our fees for set up of the scheme and management of the property purchase.
Using your own specialists
Your client can choose their own solicitor or surveyor as we do not insist on the use of a panel selected by us...
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Your clients are free to use their own valuer, solicitor or mortgage lender – provided they are regulated or hold appropriate professional qualifications. We don’t insist on the use of a property manager either – providing the functions of a property manager, such as invoicing and collecting rent, are met.
Freehold or leasehold
Freehold, leasehold and commonhold property are all acceptable, however extra due diligence is required...
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Freehold, leasehold and commonhold property are all acceptable. However, extra due diligence is required to ensure leasehold and commonhold property arrangements will not give rise to a tax charge on the scheme.
Property knowledge
For all property investments, a detailed analysis is required to identify if there are any detrimental issues...
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Detailed analysis is required to identify any detrimental elements. For example, if your client is purchasing hotel rooms - and there is a kitchen onsite - this turns the rooms into a residential apartment, which is not allowed.
As a rule, commercial property with a residential element is not permitted unless it can be demonstrated that the residential element is an integral part of the property – such as a caretaker’s flat.
Holding property
Purchasing property within a pension scheme can be made with both connected and unconnected third parties...
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Property can be purchased with both connected and unconnected third parties:
- Directly and outright – i.e. your client purchases an office to let to a third party
- Jointly with other individuals, other schemes (Dentons or otherwise) or other companies*
- Through large scale investment property syndicates
- Transfer of a property from an existing pension provider
*Joint investments do not require equal interest in the property
Purchases with connected parties – such as a member of your client’s family or business partner – must be at a commercial rate evidenced by a professional independent valuation. The property may also be leased back to the member provided all transactions are proven to be on ‘commercial terms’.
Borrowing
A scheme can borrow by way of a commercial mortgage to assist in the purchase and/or development of a property...
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A scheme can use a commercial mortgage to purchase and/or develop a property. The borrowing must not exceed 50% of the scheme fund value (net assets) at the date of the purchase and can only be secured against the purchased property – or other assets of the scheme if necessary. Any existing scheme borrowing and VAT must be taken into account within the 50% limit.
VAT
A property is either ‘subject to VAT’ when built or can be ‘elected for VAT. If VAT is applicable on the property...
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A property is either ‘subject to VAT’ when built, like many new buildings which are usually already VAT registered, or can be ‘elected for VAT’ - in the case of development work. If VAT is applicable on the property, the scheme will need to register for VAT in time for the exchange to take place.
Any VAT charged on a purchase or subsequent development work can usually be reclaimed by the scheme but VAT will still be payable on any rent. However, if the property that is let back to the member’s business is exempt – or partially exempt - from VAT, the VAT cannot be claimed back. VAT will also be chargeable on the sale price when the property is sold.
This is a very complicated area. Please contact us for further information.
Transfer of a Going Concern (TOGC)
Normally the sale of the assets of a VAT registered or VAT registerable business will be subject to VAT at the appropriate rate, however...
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Normally the sale of the assets of a VAT registered or VAT registerable business will be subject to VAT at the appropriate rate. However, in order to free up much-needed cash, it is becoming more common for businesses to sell their trading premises and rent back part of it from the purchaser.
If the vendor has opted to tax the property, VAT need not be charged if the transfer meets the conditions for TOGC status. To qualify, the assets need to be sold as part of a ‘business’ as a ‘going concern’. The purchaser(s) will need to opt to tax the property and notify HMRC from the date of transfer. They must also be registered for VAT. There is no requirement that the property be sold completely or partially tenanted.
Getting the status wrong can have major tax implications for the purchaser. You should seek advice from a specialist if your client is considering this condition.
Taking benefits
There are a number of reasons why property within a pension may need to be sold...
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There are a number of reasons why property within a pension may need to be sold. It may be an investment decision to sell, time to take retirement benefits or on death. Your clients should always remember that property is an illiquid investment and realising its cash value can take time.
However, it is not always necessary to dispose of the property in order to take benefits. It may be possible to transfer the ownership of the property. The property can also continue to be invested for clients taking Capped Drawdown or Flexible Drawdown. On death the property may be able to be transferred to a beneficiary.
However, if assets are to be used to purchase an annuity, all of the assets held within the scheme may need to be sold.