Can you buy a commercial property with a mezzanine floor through a SIPP or SSAS?

The rise in popularity of mezzanine floors in commercial properties has provided landlords and investors with an efficient way to maximise space and increase rental income. However, while mezzanine floors offer practical benefits, they can also pose unique challenges, particularly for those looking to purchase such properties using a Self-Invested Personal Pension (SIPP) or a Small Self-Administered Scheme (SSAS). Given the strict regulations surrounding these UK pension schemes, mezzanine floors can create complications that potential buyers need to carefully consider.

In this article, we explore why mezzanine floors appeal to investors, the specific issues they raise for pension purchases, and what you need to check before proceeding.

What is a mezzanine floor?

A mezzanine floor is an additional internal floor or platform that creates further usable space without significantly affecting the building’s overall structure.

Why mezzanine floors appeal to commercial property investors

As noted above, mezzanine floors have become increasingly popular within commercial properties, particularly in warehouses, industrial spaces, and retail environments. These can be permanent or semi-permanent structures, and they provide additional floor space without altering the building's external dimensions, offering a cost-effective way to expand usable space.

However, the regulatory framework governing these pension schemes is not fully clear on the types of property and alterations that are permissible, making mezzanine floors a complex and, often subjective, issue for pension investors.

Maximising usable space

Mezzanine floors can significantly increase usable floor area without expanding the building’s footprint, whether it’s for storage, office areas, or even additional retail capacity. In the context of commercial property investment through a pension scheme, this added floor space may translate into higher long-term returns, as tenants are often willing to pay more for enhanced functionality.

Higher rental income and therefore value

Adding a mezzanine floor can improve a property's value by increasing its rental income potential and overall value. This is particularly relevant for SIPP or SSAS investors who rely on rental income to generate returns within their pension funds. Mezzanine floors in properties like retail units, warehouses and office spaces widen the pool of prospective tenants and potentially attract a higher calibre demand for the space.

Challenges for SIPP and SSAS pension purchases

The regulatory framework governing these pension schemes is designed to ensure that investments are suitable for long-term retirement planning, but which do not contravene HMRC’s general rules around “taxable property.” This means there are rules and restrictions to consider.

Is the structure of the mezzanine permanent or temporary?

SIPP and SSAS pensions are highly regulated by HMRC, with rules regarding the types of property that can be held within the pension without causing tax charges. Whilst commercial properties are a permitted asset class for SIPPs and SSASs, aspects such as mezzanine floors must be evaluated carefully.

One key issue is whether the mezzanine floor is considered a temporary or permanent structure. HMRC treats temporary structures differently from permanent ones, and mezzanines may sometimes be classified as a temporary addition, especially in warehouses or industrial settings. In these cases, pension holders need to assess whether or not the mezzanine complies with the pension rules governing property investments. If the mezzanine is not properly classified, this could lead to tax penalties or make the property ineligible for the pension scheme altogether.

Does it meet health and safety regulations?

Another challenge is ensuring that the mezzanine floor complies with health and safety standards, particularly fire safety and accessibility regulations. Mezzanine floors in commercial properties must meet UK building regulations, including fire escapes, load-bearing capacity, and emergency exits. For SIPP or SSAS investors, non-compliance with these standards can complicate the acquisition process or lead to unexpected costs for renovations and legal fees post-purchase.

If a mezzanine floor has been added without proper building regulation approval, the pension trustee may refuse the investment due to the risks associated with regulatory non-compliance. This can result in missed investment opportunities and may require further due diligence before proceeding with a purchase.

How does it affect financing and valuations?

Properties with mezzanine floors can also complicate financing and valuation stages of a pension purchase. Lenders and property valuers may take a conservative approach where there is uncertainty about the mezzanine’s structural integrity or its classification as temporary or permanent. Because SIPP and SSAS pensions must comply with strict valuation requirements where there is a connection between the parties involved, trustees and administrators typically require a professional valuation confirming the property meets the scheme’s investment criteria. If the mezzanine is not factored in correctly, it can distort the property’s assessed value and affect the pension fund’s overall investment potential.

A glance at the benefits and challenges:

Weighing the pros and cons:

Opinions among pension advisors and property experts vary when it comes to mezzanine floors in commercial property investments. Some see them as an excellent opportunity to maximise returns through increasing rental income without the need for a larger building, particularly in logistics, retail, and office space, where mezzanines can make a property more versatile and attractive to tenants.

Others highlight the regulatory and financing risks. As SIPP and SSAS trustees must work within strict rules, any uncertainty around the mezzanine’s classification or compliance can cause delays or, in extreme cases, lead to the property being rejected as an investment. The added work of confirming health and safety compliance can add unforeseen costs that would affect overall returns.

Professional advice from pension and property specialists is crucial for investors considering properties with mezzanine floors within their pension funds; to confirm the property meets HMRC’s requirements and all relevant legal obligations.

Key takeaways:

• Maximised Space: Mezzanine floors offer additional floor space that can enhance rental yields and property value.

• Regulatory Challenges: SIPP and SSAS investors must ensure mezzanine floors comply with HMRC rules, building regulations and valuation requirements.

• Due Diligence: Professional advice is essential to navigate the complexities of mezzanine-equipped properties and ensure compliance with pension regulations.

By weighing the pros and cons, pension investors can make informed decisions about whether mezzanine-equipped commercial properties are suitable for their long-term retirement strategy.

Frequently Asked Questions (FAQs):

Can a SIPP or SSAS buy a commercial property with a mezzanine floor?

A SIPP or SSAS can buy a commercial property with a mezzanine floor, but care has to be taken to establish whether or not the mezzanine floor would be classified as “tangible moveable property” by HMRC. If the mezzanine floor could be dismantled and re-assembled without damaging it or its surroundings, there is a good chance that it would be treated as something which can be touched and moved by HMRC and give rise to tax charges. In this case, it would have to be excluded from the purchase price paid by the SIPP or SSAS and funded separately by another party. The SIPP or SSAS would also not be able to benefit from any uplift in rental income linked to the mezzanine.

Does HMRC treat mezzanine floors as permanent or temporary structures?

HMRC does not provide definitive guidance on what constitutes “tangible moveable property” and therefore will not comment in advance on what might be permanent or temporary structures. It is therefore down to experience and judgement of the pension provider whether or not tax charges might arise.

Do mezzanine floors affect a property's valuation for pension purposes?

The only person who can determine the value of a mezzanine floor in a building is a RICS Registered Valuer. Depending on the size and quality of the mezzanine floor, its underlying structural soundness and so on, the Valuer may determine that it has some value or no value.

Dentons Pensions does not provide regulated financial advice. We only provide factual information on our own Dentons’ SIPP or SSAS products and the services we offer here at Dentons. We strongly advocate that clients obtain sound, regulated financial and/or investment advice regarding the suitability of a SIPP, SSAS or any investment.