"Splitting the title": mixed-use property in a SIPP or SSAS

SIPP and SSAS pension schemes can invest in commercial property in a tax-efficient way. However, mixed-use buildings, such as a flat located above a shop, can risk triggering HMRC’s ‘taxable property’ rules.

The term ‘splitting the title’ can mean different things and, in general, it refers to the legal process of separating a single property or land title into two or more separate titles. In the context of self-invested pensions, it is often used to ensure that the pension scheme owns only the commercial aspect of a property and not any residential part and thus avoiding any risk of charges relating to ‘taxable property’ arising from the residential element. This article covers how this type of “splitting the title’ works and what to be wary of in depth.

Commercial property purchase is regarded as one of the most popular investment choices within the self-invested pensions world of SIPPs and SSASs.  The reasons behind the popularity of commercial property are primarily structural and tax-driven:

• the pension scheme is a separate legal entity from the client / client’s company
• rental income is received tax free into the pension scheme bank account
• rental income payable by the tenants can be treated by them as a business expense for tax purposes
• no Capital Gains Tax to pay on eventual disposal of the property
• a business could benefit from cash flow enhancements when a property is purchased from it because it is selling an asset it owns

The UK commercial property market contains a wide array of property types. These include:

• offices
• shops
• industrial/ business units
• warehouses
• hotels and public houses

When could a commercial property investment cause tax charges in a pension?

Generally, most straightforward commercial property purchases within a SIPP or SSAS possess minimal tax risk because there is little likelihood of there being any residential element from which a pension scheme member, or relative, could derive a personal benefit. In turn, this significantly reduces the possibility of tax charges arising in relation to the scheme having made that investment. 

Properties that could cause ‘taxable property’ issues can include mixed-use properties such as small hotels / bed & breakfast establishments, flats above shops and restaurants and manager’s accommodation in public houses. 

‘Mixed-use’ means the property has some form of residential accommodation either attached to, adjacent to, or close to the property, accompanied by a commercial element to the property. 

Such properties could be treated as taxable property at the point of purchase by the scheme, unless they comply with the very restrictive HMRC rules that surround mixed-use commercial / residential property. 

The value of any non-compliant residential element would give rise to penal HMRC tax charges on both the pension scheme member(s) and the pension scheme. This is an ongoing test, not simply one that applies at the point of purchase by the self-invested pension scheme. In practice, these rules can be very restrictive and can make mixed-use ownership unworkable for clients.

What is “splitting the title”?

'Splitting the title' is an over-arching and broad term to describe a legal process whereby one element of a property is legally separated from another element, such as separating a flat from a shop which sits below it.  

This ensures that the pension scheme only holds a legal interest in the commercial element and possesses no interest in the residential element of the property. This separation needs to be both physical and legal to avoid any potential tax charges.

How does “splitting the title” work?

In the case of a flat above a shop, the process is usually as follows:

• Freehold is acquired: The freehold of the whole property (shop and flat) is acquired by the client / client’s company, or a third party
• freeholder then grants a long leasehold interest (e.g. of 999 years), often simultaneously, to the pension scheme, at commercial value.
• the pension scheme then leases the shop to a tenant through an occupational lease and receives a tax-free rental income into the scheme.

What is the result?

• the client/client’s company owns the freehold of the flat and the ground above which it sits, and the pension scheme holds a long leasehold and legal interest in only the shop below 
• the pension scheme has no interest in the flat at all, and it will not be entitled to any ground rents from it
• the flat can be occupied by anyone of the client’s choosing at any time. This provides the flexibility with the property which most clients desire.

However, for this to work, the residential property must have its own separate access and services. In addition, there may be duplication of legal fees if the purchase involves the two-stage process outlined above.

Want to find out more? See our case study: Mixed-use property purchase 

As ever with property acquisition, legal advice should be sought by clients based on their specific circumstances. 

Frequently Asked Questions (FAQs):

What is taxable property in a SIPP?

Taxable property in a SIPP is an asset (or part of an asset) which HMRC considers to be something upon which it is necessary to raise a tax charge under the terms of the legislation governing pensions. Examples include things which can be touched and moved (such as desks, computer equipment, tables, chairs and so on) - these are “tangible moveable property.” Other assets which might give rise to taxable property charges include residential property which does not comply with HMRC’s narrow rules and unlisted shares which give the pension scheme the ability to influence/control votes at shareholder meetings. 

Does ‘splitting the title’ eliminate HMRC tax charges?

If done correctly whereby the pension scheme legally only holds an interest in the commercial element of the property, then tax charges should not arise unless there is some other factor which could give rise to these (for example, there is “tangible moveable property” within the commercial element which is also owned by the pension scheme).  

What types of property need a title split in order to have SIPP or SSAS ownership?

Every property is unique and therefore requires individual assessment. In general terms, splitting the title is required where the residential element will give rise to tax charges if owned by the pension scheme and it needs to be legally separated from the commercial part. Often, it is flats above shops but it can also include land / property at ground level – for example, a farmhouse next to land which is to be owned by the pension scheme.

Who needs to be involved in a title split?

The solicitor acting on behalf of the pension scheme will need to ensure that the transaction is structured accordingly so that the pension scheme has no legal and/or financial interest in the residential element.

What does ‘splitting the title’ mean in relation to pensions?

Splitting the title in relation to pensions means legally separating a commercial element of a property from a residential element in order that the pension scheme has no legal and/or financial interest in the residential element.  

Can a SIPP or SSAS own a flat above a shop?

A SIPP or SSAS can own a flat above a shop without taxable property charges applying, provided that it also owns the shop below and also provided that the person living in the flat is not a scheme member or a relative of a scheme member. This person must also be required to live there as a condition of employment under a contract of employment.