Why SIPP property purchase needs careful consideration

Since their conception 30 years ago, the ability for self invested personal pensions (SIPPs) to invest in commercial property has been one of their key attractions.

From a taxation point of view, gains in the value of property held will be free of capital gains tax and rent received from tenants will escape income tax. Further, as in many cases where the property is leased to the member’s business, the rental payments will be tax deductible for corporation tax (or income tax in the case of the self-employed/partnerships), which is effectively a tax efficient way of moving funds from one pocket of the member’s wealth to another.

It should not be forgotten that assets held within a SIPP sit outside of an individual’s estate and thus would normally be exempt from IHT in the event of death.

It is not surprising then, that when SIPPs were first independently regulated back in 2007 and the market expanded considerably, many of the new entrants felt it necessary to offer a commercial property option so that their product could be deemed competitive.

Regulatory thematic reviews and increases in capital adequacy requirements have however seen the SIPP operator market decline in numbers and it would appear we are moving towards polarisation of operators focusing on their platform business and fewer continuing to resource their non-platform offerings.

Even among those retaining a commercial property option, there are wide ranges in propositions. Many will restrict certain categories of property, some do not permit mortgage borrowing and some do not permit the joint ownership of property.

It is vital that when considering a SIPP operator that the property proposition is understood not only if the SIPP is to be used for immediate purchase, but also if it might be a possible future investment. The latter was highlighted in roadshows we held earlier this year, where questions were raised by advisers on the flexibility of joint ownership and staggered purchases.

Staggered purchases

These options have become more relevant with the continuing reduction in the Annual Allowance and potential tapering meaning that SIPPs cannot be funded as quickly as they could be in the past. The ability for SIPPs to borrow only up to 50% of their net value (and any VAT to be included within this borrowing limit) often means that property cannot be acquired outright in one tranche.

Property is often purchased for the purpose of accommodating the business in which two or more members are involved so the flexibility of joint and sometimes staggered purchases can be useful.

There are other planning issues too. Even when a property could be acquired outright perhaps from a member personally or from his business, it might be prudent to stagger the disposal of the property over more than one tax period so the disposal, which might realise a gain for the vendor can be managed efficiently.

The new pension freedoms also open opportunities for the creative use of property in the payment of both retirement and death benefits. With jointly held property, it is no longer a case of property being an illiquid asset (either owned or sold). Tranches of property can be paid as benefits which can be particularly useful for retirement income, or where post age 75 death benefits are being paid, where the tranches could be managed to fall within an income tax planning strategy.

Commercial property can be jointly owned between a member’s SIPP and any of the following:

• Other SIPPs of the same operator
• SIPPs of another operator (although this might be more costly)
• Other registered pension schemes including SSAS
• The member personally or parties connected with them
• Unconnected individuals
• Corporate entities including those connected with the member.

While SIPP borrowing is restricted, non-SIPP joint parties are able to borrow on commercial levels. It is important though that any borrowing is ring fenced and no cross subsidisation of deposit or security can be permitted.

It is also possible that the proportional ownership can be varied. This can be particularly useful in the case of partnerships where one partner might wish to retire and his SIPP’s interest in a joint property could be equally bought between other partners’ SIPPs.

These changes in ownership can be best documented when the property as a whole is held in a tax neutral nominee trust, which can be varied by deed of variation each time the ownership proportions change. This exercise would also require the need to effectively value the property at each transaction and where connected parties are involved, this would require a valuation from a RICS registered valuer to evidence the arm’s length nature of the transaction. For this reason it might be prudent to limit the frequency of transactions and keep an eye on the size as there is obviously a cost at each event.

A final point to consider is that each transfer is a disposal and acquisition, and for non-pension participants, capital gains tax might be triggered on the disposal and, if above the threshold, stamp duty land tax triggered on the acquisition.