Posted on 10/07/2018 by Stephen McPhillips
SIPP providers' asset acceptance procedures have been under the spotlight in the recent past and whilst it is generally considered that these procedures apply to the more esoteric assets, due diligence will apply to all assets accepted, whether non-standard or standard.
Property and land are a popular investment into SIPPs and over the last six months we have seen a plethora of proposals relating to bare land, many of which are perfectly viable but several of which we have to reject. Set out below are some of the criteria we apply to the review of land proposals and some examples that we’ve had to decline.
Land can often be a good investment, with some popular examples being farmland leased to an unconnected party providing an income and this brings us to the first criteria – the investment rationale. If a SIPP provider is asked to purchase land, there must be an underlying investment reason for doing so.
As a general rule, we are less likely to accept speculative non income producing land where there is no realistic likelihood of development potential. At extremes, this is known as land banking.
It is preferable to have land tenanted so that it can be maintained and insured by the tenant. This will also provide rent and thus an investment return. If the yield is unusually low, particularly where the tenant may be a connected party to the SIPP member, this may also be cause for further investigation.
Questioning the purpose for the investment often reveals some home truths. On occasion there has been no investment rationale at all. Reasons cited for the purchase have included:
To establish a rationale, we insist on a “business plan” to demonstrate a commercial use. Some plans have attempted to disguise uncommercial uses of the land and have included SIPP members “hobbies”. These include running photography courses, rare breed pig breeding on a small holding, equestrian grazing so that the member can keep their horse near to their home and finally glamping which became fashionable, all of which sound plausible up to the point that the business case doesn’t match the expectation of financial return to the pension scheme versus capital outlay. These examples often relate to land adjoining that being owned by the SIPP member themselves.
In some instances, we have seen a proposed purchase of a plot consisting of a farmhouse and adjoining land where the investor can afford to buy the house but not the land and so has proposed that their SIPP can buy the land. Where there is no other rationale for the purchase, the land purchase will likely be rejected.
That is not to suggest that land cannot be an attractive investment. We have seen proposals for the augmentation of income through the leasing of land for communication masts and for the development to include the building of stables and exercise yards which can achieve attractive yields.
Where sufficient rationale does exist, there is still additional criteria to be met. Where a deal has been struck by the SIPP member for a plot as a whole, to be part acquired by them and part acquired by the SIPP, the proportion of the purchase price that relates to the SIPP land purchase must be identified and professionally valued to ensure that an arm’s length value is paid for the SIPP investment.
Any area of land to be purchased must have a separate title, be clearly defined and identifiable with clear boundaries such as a road, river, hedgerow or substantial fencing. It must have separate access and be able to be sold independently of any land or property adjoining it, for fair value should need arise.
Any buildings on the land although probably not subject to the new MEES EPC rulings, will still have to be assessed for asbestos and the land will be subject to an environmental search to ensure that the SIPP is not purchasing potential liabilities.
If the land is to be leased to the SIPP member or any party connected with them, the rate at which the rent is set will be required to be at an open market rate determined by a professional valuation. Similarly, at a rent review or lease renewal an updated valuation will be required.
A final thought is to manage client expectations with regard to SIPP provider land acquisition costs. Irrespective of the size of land plot or value, ensuring the land meets acceptance criteria, and that good title has been obtained will have a set minimum cost. Similarly, SIPP annual fees will also be payable. Lower valued land proposals, if not a part of a larger valued SIPP may simply be economically unviable to acquire.
As seen in Professional Paraplanner 13 May 2018