A pension scheme can borrow by way of a commercial mortgage to assist in the purchase and/or development of a property...

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Borrowing must not exceed 50% of the net market value of the scheme's assets at the date of the mortgage advance and can only be secured against the property being purchased and, where necessary, any of the scheme's current assets. Any existing borrowing has to be taken into account when calculating the 50% limit. This limit still applies where VAT is payable on the purchase price.


There are several costs that need to be taken into account...

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You need to take into account all likely costs when considering property as an investment. In addition to the property purchase price, consideration should be given to:

  • solicitor fees
  • valuation fees
  • land registry fees
  • stamp duty land tax (England and Wales) and land and buildings transaction tax (Scotland) for commercial properties over £150,000
  • VAT (if applicable)
  • lender’s fees, if applicable
  • environmental risk survey, EPC certificate (see below) and an asbestos survey, if required.

Dentons will also apply charges for acquiring the property purchase through the pension scheme, including a desktop environmental risk assessment. All charges in respect of the property investment should be paid from the pension scheme as they are a direct cost of the pension scheme investment strategy.

EPC Certificates

With effect from April 2018 it is only possible to let out commercial properties that meet the minimum energy efficiency standards.

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Business (and residential) premises that do not reach the minimum energy efficiency standards, will be unable to let out their premises. The lowest acceptable rating is E. Therefore commercial properties currently on F or G ratings, and some properties currently on E ratings, will need to take steps to improve their energy efficiency.

Holding property

There are many ways in which a pension scheme can acquire commercial property...

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Commercial property can be acquired in any of the following ways:

  • directly and outright – e.g. the pension scheme purchases an office and lets it out to a third party
  • jointly with other parties, including other pension schemes (whether with Dentons or not) individuals and/or companies*
  • as a participant in a large scale investment syndicate
  • a transfer 'in-specie' from another pension scheme as part of the transfer of a client's accrued pension benefits.

*Joint acquisitions do not require each participant to have an equal interest in the property.

Please note: Dentons does not allow overseas commercial property within its SIPP or SSAS.

Property investment returns

The level of investment returns from commercial property are affected by expenses incurred by the pension scheme, rent(s) being paid by tenants and on any capital growth achieved.

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Depending on the quality of the tenant(s), there may be periods where no rental income is received by the pension scheme, but there may still be expenses to be covered by the pension scheme (such as mortgage repayments, insurance premiums, rates, etc.).

Certain types of commercial property typically offer lower investment returns than others and you should satisfy yourself that any direct property investment makes economic sense in your circumstances.


As a rule, commercial property with a residential element is not permitted unless ...

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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 commercial property and is 'job related', eg a caretaker's flat within an office or a shop with a flat above which is occupied by the shopkeeper in connection with running the shop and the shopkeeper is unconnected with the client.

Taking benefits

A pension scheme may need to sell property for a number of reasons...

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The main reasons why a pension scheme may need to sell a property investment are:

• advisers and clients consider it an appropriate time to sell as part of the client's investment strategy
• cash is required in order to pay out retirement or death benefits or to buy an annuity.*

*In certain circumstances, it may be possible to transfer ownership of a property to a client or their beneficiary as payment of retirement or death benefits respectively, instead of selling the property and paying the benefits in cash. However, cash will be required if an annuity is to be purchased.

Advisers and clients should always bear in mind that property is an illiquid investment and realising its cash value can take a considerable amount of time.

Property can be retained as an investment of the pension scheme for clients or their beneficiaries receiving capped drawdown or flexi-access drawdown provided there is sufficient cash to pay the required levels of drawdown.


Clients need to be realistic about the timescales involved in a property transaction …

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Clients need to be realistic about the timescales involved in a property transaction as unexpected issues could have a major impact on the ability to meet deadlines.The time taken to complete a property purchase within a pension scheme will vary depending on the complexity of the arrangement but a minimum of 6-8 weeks should be allowed.

Transactions between connected persons

Where a property is purchased from a person connected with a client (e.g. a member of their family, a business partner or a connected company) it must be at the market value as confirmed by a Royal Institution of Chartered Surveyor's (RICS) Registered Valuer, whose report should comply with their professional standards.

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Completion must take place within 3 months of the date of the valuation otherwise an updated valuation will be required. If the property is to be leased back to a connected person the rent payable must be the market rent as confirmed by a RICS Registered Valuer, whose opinion should comply with their professional standards.

Transfer of a Going Concern (TOGC)

Normally the sale or transfer in-specie of a property (that has been elected for VAT i.e. 'opted to tax') by a VAT registered or VAT registerable business will include VAT. However, where the property is subject to an existing lease and the buyer (eg the pension scheme trustees) is VAT registered and has elected to tax the property, the sale will usually qualify as a TOGC, in which case the seller does not have to charge VAT on the sale price.

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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. 

Getting the status wrong can have major tax implications for the purchaser. You should seek advice from a specialist if your client is considering acquiring property that involves VAT.

Using your own specialists

Clients can choose their own solicitor or surveyor. We do not insist on the use of a panel selected by us...

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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.


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’ (also known as 'opted to tax') - in the case of development work. If VAT is applicable on the property, the scheme trustees will need to register for VAT and opt to tax the property in time for the exchange to take place.

Any VAT charged on a purchase or the costs of any subsequent development work, can usually be reclaimed by the scheme but VAT will still be payable on any rent. Therefore, if the tenant's business is exempt from VAT, the tenant cannot claim back the VAT.

VAT is charged on the sale price of a property that has been opted to tax unless the sale is deemed to be a Transfer of a Going Concern (TOGC).

This is a very complicated area. Please contact a VAT specialist for further information.

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