If you want to find out more, whatever your retirement needs, one of our experts will be happy to discuss how we can help you achieve your goals.

The benefits

Key advantages Asset 1

Key advantages of a commercial property purchase:

  • Tax relief on contributions to the pension scheme which can be used to purchase the property
  • Any gain on the property value is free from capital gains tax
  • Open market rent is paid to the pension scheme
  • All rent is paid to the pension scheme
  • Rental income payable by the tenants can be treated by them as a business expense for tax purposes which can reduce the income and corporation tax liability of the tenant
  • Property is outside the member's estate for inheritance tax
  • Capital released back to the business when property is purchased from it, can help with cash flow
  • Opportunity to borrow funds towards the purchase and development of the property
  • Once the mortgage is paid off, ongoing rent and contributions can continue to build the retirement fund: these can be used for other investments and/or to pay benefits on retirement
  • The property may not need to be sold as continuing income could service pension payments
  • Should the business fail then the property will be protected from creditors.

Aside from the advantages mentioned above, you should always take other factors into account when holding commercial property within your pension scheme. 


The rules

Property development Asset 1

Commercial property can be developed or refurbished as part of a pension scheme provided no residential element is added. Similarly, land can be purchased and used to develop commercial premises.

We will need to see written quotations and details of the proposals so we can authorise the improvements or development prior to any work taking place.

If your business, or a connected persons' business, is to undertake the property development/refurbishment, we will require quotes from that business along with quotes from at least two other unconnected businesses for comparison purposes.

Auction purchases Asset 1

We will consider the purchase of a property at auction through your pension scheme. However, we need adequate time before the auction date to ensure the suitability of the property and confirm that sufficient funds are in place.

If you have transferred funds to your pension scheme from another pension scheme, to facilitate the purchase of a property at auction, there is a mandatory 30-day transfer period during which these funds are not permitted to be used for an illiquid investment such as property.

Unacceptable purchases Asset 1

If a pension scheme becomes involved in the frequent purchase and/or development and selling of properties, HM Revenue & Customs (HMRC) may deem such transactions as 'trading'. Whilst both capital and income investment gains are normally tax exempt, if trading applies any associated income and capital gains would then be taxed accordingly.

Can residential property be held within a full asset SIPP or SSAS? Asset 1

As a rule, commercial property with a residential element is not permitted but there are a few key exceptions.

Commercial property with a residential element may only be accepted if:

  1. the residential element is occupied by an employee of the tenant as a condition of their employment and they are not connected with their employer or the pension scheme member or anyone connected with the pension scheme member (e.g. a caretaker’s flat) or
  2. it is occupied by a person who is not connected with the pension scheme member or anyone connected with the pension scheme member, in connection with the commercial element (e.g. a flat above a shop that is leased with the shop and the flat is occupied by the person plying their trade from the shop).

Beach huts, holiday lets and time shares are not allowed but student flats that are part of a hall of residence directly connected to an educational establishment may be considered.

Acceptance of any commercial property is subject to satisfactory due diligence and Dentons will review all property purchases on a case-by-case basis. 

Dentons' acceptance Asset 1

Dentons will review all commercial property purchases on a case-by-case basis. We reserve the right to refuse purchases and/or any proposed developments of property if we believe that the purchase or development may give rise to a tax charge or there were unacceptable levels of potential risk such as contamination.

The structure

Joint ownership Asset 1

Our pension schemes can jointly acquire commercial property with other parties. This does not have to be in equal proportions. Potential parties include:

  • other Dentons' pension schemes
  • pension schemes from another provider
  • connected or unconnected individuals or companies.

Where joint purchases occur, a separate bank account is usually set up into which rental payments are made and, if borrowing is required, mortgage payments deducted. Any surplus funds are then distributed in the appropriate proportions to the joint property owners. There should be sufficient funds in each individual pension scheme fund to meet any liabilities.

If not, you - or the other parties - may have to provide further funds. Those parties that are pension schemes would first need members or employers to make contributions to the scheme (which would be subject to contribution limits).

In addition, where joint ownership of the property is concerned, the property should be purchased using a declaration of trust.

The trustee(s) of the declaration of trust, as the legal owners, will act as nominee(s) holding the property for the benefit of the participants in the relevant proportions. 

Are transactions between connected persons allowed for a commercial property purchase? Asset 1

Where a commercial 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.

​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.

Can a commercial property be held with another party? Asset 1

A SIPP or SSAS can acquire commercial property 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
  • 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.

*Acquisitions with other parties do not require each participant to have an equal interest in the property.

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

Pension structure Asset 1

If your chosen investment vehicle is a full asset Dentons SIPP, this is established as an individual sub-trust, unique to you as the Member and co-trustee. In order to give you independence and security to your pension scheme, our trustee company - which is a non-trading company - will act as the independent co-trustee.

For a SSAS, this is established as an individual stand-alone trust by the sponsoring employer for the benefit of the scheme members. All members of the scheme should be trustees together with our professional trustee company.

The property will normally be registered in the name(s) of the Member trustee(s), albeit our trustee company will require a restriction on the title in order to approve any subsequent changes in ownership.

Purchase considerations

What costs should be considered in purchasing commercial property? Asset 1

You need to take into account all likely costs when considering commercial property as an investment within a full asset SIPP or SSAS. 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 assessment*, 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 SIPP or SSAS as they are a direct cost of the pension scheme investment strategy.

Financing Asset 1

You'll need to ensure that sufficient funds are available in the pension scheme to cover all costs. Therefore, a suitable funding plan should be set up before a property can be purchased. Please see our 'Financing the purchase' section below.

Illiquid investment Asset 1

Commercial property is an illiquid investment and disposal of it may take an extended period of time. You should take this into account when considering the investment in light of the need for liquid assets to pay benefits as and when they fall due.

At this stage the property will need to be valued which incur a cost to the pension scheme.

Whilst commercial property can be an excellent long term asset, you should be mindful of possible exit strategies.

Taking income Asset 1

If you're taking pension income, the property can continue to be an investment. However, if your fund is used to purchase an annuity, all of the assets held within the pension scheme, including any property, may need to be sold.

On death Asset 1

On death, the property will be treated in the same way as any other investments held within the pension scheme. Providing enough cash is available to settle any tax charges, it may be possible to transfer ownership to a beneficiary as an in-specie benefit and avoid the need to sell the property.

Time scales for the purchase Asset 1

Where borrowing is required to finance a commercial property transaction, contracts will not be exchanged until the relevant financial arrangements are in place. The time taken to complete the property purchase within a pension scheme will, therefore, vary depending on the complexity of the arrangement.

You should allow a minimum of 6-8 weeks.

In summary, you need to be realistic about the timescales involved because unexpected issues could have a major impact on the ability to meet deadlines.

Environmental and legal issues Asset 1

When we receive initial details about your property, we’ll commission an initial desktop environmental survey on behalf of the trustees. These reports are for the benefit of the trustees, rather than for a lender. As a result, the solicitor may also need to carry out an environmental survey on behalf of the lender.

This environmental report is crucial. If land is designated as contaminated, and the polluter cannot be found, the ‘owner or occupier’ will be deemed the appropriate person to bear the cost of cleaning up the site or adjacent sites if third party damage is created.

For commercial properties, especially buildings constructed before 2000, there may be a risk from asbestos products. This needs to be identified and addressed prior to purchase. For this reason the asbestos register and management plan needs to be available.

Failure to comply with the Asbestos Regulations may result in the Health and Safety Executive taking action against the ‘duty holder’. This is normally the person responsible for the maintenance and repair of the premises under the terms of the lease, which is usually the tenant, but could also include the trustees, as owners. There may also be a need to commission an Asbestos Survey.

Connected persons Asset 1

Your pension scheme can purchase property from you, a person connected with you or any other party. However, any purchase from or disposal (including a lease) to a connected person must be evidenced as being on a commercial basis. It needs to be on ‘arm’s length terms’ in accordance with an independent professional property valuation by a recognised Member or Fellow of the Royal Institution of Chartered Surveyors (MRICS/FRICS) who is a Registered Valuer and will therefore carry out the valuation in accordance with RICS ‘Red Book’ standards.

A ‘connected person’ includes the following:

  • you (as the Member), your spouse or civil partner
  • a relative of either you or your spouse or civil partner
  • the spouse or civil partner of a relative of you or your spouse or civil partner
  • a person who is in partnership with you or your spouse or civil partner or relative
  • a company which is controlled by you and/or persons connected with you.

Please note: ‘Relative’ in this context means brother, sister, ancestor or lineal descendant. For HMRC reporting purposes ‘connected person’ also includes close companies of which you – or a person connected with you – are a director. 

Rental payments between connected parties must be maintained on an ‘arm’s length’ commercial basis or tax charges will apply. If the tenant is a connected party and is in financial difficulty, the rental liability will still continue.

Investment return Asset 1

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

​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 for your own circumstances.

Financing the purchase

Is borrowing allowed to help purchase commercial property? Asset 1

A full asset SIPP or SSAS can borrow by way of a commercial mortgage to assist in the purchase and/or development of a commercial property.

However borrowing must not exceed 50% of the net market value of the scheme's assets at the date of the mortgage advance. It 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.

Borrowing Asset 1

Your pension scheme can borrow to help with the acquisition of investments – such as commercial property – by way of a commercial mortgage. Any mortgage offer must limit the liability of the trustees to the security given, or, if necessary, the assets of the pension scheme.

The maximum level of borrowing allowed is 50% of the net asset value of the pension scheme on the day immediately prior to the borrowing and this can only be secured against the purchased property or other assets of the pension scheme.

Any existing borrowing must be accounted for within the 50% fund limit and borrowing cannot be extended to meet VAT if it applies.

We will consider any reputable commercial lender for the borrowing and can provide guidance to the lender on the legal requirements of the mortgage loan.

Borrowing from a connected party is also permitted if it can be evidenced that borrowing on identical terms could have been secured from a third party lender.

The mortgage loan is usually based on capital plus interest. However, an interest only loan may be acceptable in certain circumstances and subject to the lender’s terms.

Please note: The ability to borrow does not cease once benefits have come into payment from the pension scheme.

Any mortgage offer must limit the liability of the trustees to the assets of the pension scheme

Transfer of property in-specie Asset 1

An in-specie transfer is the transfer of the legal ownership of an acceptable property held in another of your pension schemes to the trustees of your Dentons’ pension scheme as part of the transfer of your accrued benefits.

Such a transfer is not normally subject to Stamp Duty Land Tax, Land and Buildings Transaction Tax (for properties in Scotland) or VAT (where the property has been opted to tax) provided the transfer qualifies as a Transfer of a Going Concern. 

Appointing specialists

Can clients use their own specialists for the property purchase? Asset 1

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

​Clients are free to use their own solicitor, lender and RICS registered valuer. 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.

Solicitors Asset 1

Your solicitor will be acting on behalf of the trustees and will need to keep us informed of progress. It will be the solicitor’s responsibility to undertake all of the usual searches and confirm that there are no adverse factors – including environmental issues – which need to be brought to the purchaser’s attention. 

Registration of the property at the Land Registry should reflect that the property is held in trust and not held personally with a beneficial interest. This means that, once acquired, the property will normally be registered in the names of the Member trustee(s).

If any borrowing is involved, we would expect the solicitor to ensure that the interests of the trustees are protected. Any mortgage offer must limit the liability of the trustees to the security given, or, if necessary, the assets of the pension scheme and in no circumstances should any liability of our trustee company be personal.

If a new lease is required, it must be prepared by your solicitor.

Surveyors Asset 1

Where required, you should appoint an independent professional surveyor who is MRICS and FRICS qualified and is a Registered Valuer, to carry out a survey and valuation of the property on behalf of the pension scheme trustees.

We would expect completion to have taken place within three months of the date of the surveyor’s valuation otherwise an update to the valuation will be required.

If borrowing is involved, the proposed lender may be prepared to accept your surveyor’s report and valuation. However, in some cases, they may insist on a report from their own approved surveyor. 

We will require evidence of the value of the property which can be a letter from the surveyor. A full survey report is not normally required by us.

Where the property is to be leased to a tenant who is connected with you, the surveyor must also confirm the market rent that should be charged.

Lenders Asset 1

The trustees have power to grant a charge over assets owned by them. Any borrowing needs to be granted to the trustees. Under no circumstances can cross guarantees or cross subsidy be given.

We will need to see any documentation, and approve any borrowing, prior to exchange of contracts to ensure that it meets with both our own and HMRC requirements.

Where more than one pension scheme and/or other parties join together to purchase a property, a Declaration of Trust will be put in place, which will confirm each pension scheme's/party's beneficial interest in the property. The trustees of that Declaration of Trust will be the registered owners of the property.

If a pension scheme takes out secured borrowing to assist with such a joint purchase, the loan agreement will be with the pension scheme trustees (and there will need to be a separate loan for each pension scheme) but the legal charge will need to be granted by the trustees of the Declaration of Trust, as the registered owners. We will provide a draft Declaration of Trust for the appointed solicitor's consideration.

Tax considerations

Disposal of the property Asset 1

Under current legislation, there will be no capital gains tax to pay on disposal of the property by the pension scheme.

Inheritance tax Asset 1

Property held within the pension scheme is outside the member’s estate for inheritance tax.

Rental income Asset 1

All rent from tenants is received gross and is free from income tax. Rental income payable by the tenants can be treated by them as a business expense for tax purposes and can reduce the income and corporation tax liability of the tenant.

Why is it important to consider VAT? Asset 1

A property is either ‘subject to VAT’ when built 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) (see below).

In addition, stamp duty land tax (England and Wales) and land and buildings transaction tax (Scotland) for commercial properties over £150,000, will need to be paid at the prevailing rate on the VAT element also. For example, if a freehold commercial property in England is bought for £360,000 (inclusive VAT), the stamp duty land tax payable would be calculated as follows:

  • 0% on the first £150,000 = £0
  • 2% on the next £100,000 = £2,000
  • 5% on the final £110,000 (the remaining amount above £250,000) = £5,500

Total amount payable = £7,500

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

What is a Transfer of a Going Concern (TOGC)? Asset 1

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 registrable 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.

​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.

VAT implications Asset 1

It’s important to understand the implications of VAT on the property and the pension scheme from outset. A property is either ‘subject to VAT’ when built – many new buildings are usually automatically opted for VAT – or can be ‘elected for VAT’, such as for development work.

If you decide to register the pension scheme trustees for VAT, this will enable the reclaiming of any VAT on the purchase price. If so, the registration needs to take place before the property is purchased. Similarly, if your pension scheme is developing or refurbishing a property, VAT on the costs incurred may also be reclaimed.

To do so, you will have to opt to tax, which means VAT will be chargeable on rent. Quarterly VAT returns will also be required.

All invoices and rental costs should be addressed to the trustees of the pension scheme. VAT will also be chargeable on the sale price when the property is sold.

Please note: Getting the VAT status wrong can have major tax implications. You should seek advice from a VAT specialist.

Managing the property

Your obligations Asset 1

We don’t insist upon the appointment of a property manager – provided it can be demonstrated that the necessary property management functions are being undertaken.

These tasks include:

  • adequately insuring the property
  • ensuring leases are prepared by your solicitor
  • invoicing rents and securing payment in accordance with the lease
  • undertaking rent reviews
  • completing VAT returns
  • meeting all legal duties such as environmental and asbestos management requirements
  • ensuring the tenant observes the covenants in the lease (e.g., payment of rates, taxes and insurance premiums)
  • monitoring the condition of the property and ensuring the tenant arranges for any necessary repairs or maintenance to be carried out to an acceptable standard
  • maintaining proper records and books of accounts, which should be available for inspection.

We do, however, have a fiduciary responsibility to monitor rental payments and, should they fall into arrears, to take legal action to recover what is owed.

The property should also be re-valued periodically to ensure its current value is recorded correctly in the pension scheme valuations or accounts. We don’t insist upon formal valuations other than on important dates – including commencement of benefits and periodic benefit reviews.

Insurance Asset 1

As owners of the property, the trustees have a responsibility to ensure adequate insurance is in place – including public liability insurance if applicable – and we will request copies of all relevant certificates.

The property must also comply with current disability discrimination laws. Dentons will arrange for the property to be insured under a block policy arrangement unless alternative arrangements are required or the property is a leasehold and the freeholder arranges the insurance.

Leases Asset 1

Your pension scheme can lease a commercial property to anyone. This includes your business, your company, a partnership in which you are a partner or to a person with whom you are connected, provided it is for business purposes.

Where the lease is to you, or a person connected with you, it must be on ‘arm’s length commercial terms’. It would be expected that a tenant would enter into a full ‘insuring and repairing lease’ with regular rent reviews and the solicitor must once again act on behalf of the pension scheme trustees.

Leasing to unconnected third parties is acceptable and, in such cases, no evidence for setting rental terms is normally required.

A solicitor must draft all leases.

Rental payments Asset 1

Where the property is leased to a connected person, the pension scheme trustees will commission an independent professional surveyor who is MRICS or FRICS qualified and is a Registered Valuer, to determine the open market rent payable based on the proposed lease terms.

If improvements to an existing commercial property, or those purchased with the intention of making improvements, are carried out, outside of the normal repairing and maintenance terms of the lease, then the rent may need to be reviewed. This may involve a variation to the existing lease and an updated rental valuation.

Where non-payment of rent or another debt is created, which is not repaid on ‘arm’s length terms’, the member or tenant may be liable to tax charges. This debt may be seen as a ‘loan’ and become an ‘unauthorised payment’ under pension tax rules. In addition, the pension scheme may be subject to a Scheme Sanction Charge.

Vacant property Asset 1

If the property becomes vacant it is important there is sufficient liquidity within the SIPP or SSAS to ensure that ongoing costs are met.

​If the property is vacant or the rent does not meet the ongoing liabilities such as insurance, business rates, loan payments (if applicable) and Dentons fees, a cash float will be required to ensure these liabilities can be met.

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Speak to an expert today.

Whatever your retirement needs, one of our experts will be happy to discuss how we can help you achieve your goals.