Help build your pension fund with commercial property

Commercial property is a common and popular way for people to invest their pension funds. It is typically low risk and can offer the potential for a good rate of return on your capital.

By Kerry Houghton, Taylor Patterson.

That being said, not just any property can be purchased into an appropriate pension scheme. Below is a list of the more commonly approved types of property:

• Offices
• Industrial units
• Shops and retail units
• Agricultural land and forestry
• Hotels and Inns
• Hospitals, nursing and care homes
• Certain types of student halls of residence
• Some leisure property e.g. golf courses, fishing rights, marinas, moorings and sports grounds
• Development land

Despite being listed as approved property above, certain leisure properties are unable to be held in a pension. Leisure property cannot be used by the member or any “connected person”, unless that person pays the market rent, fee or levy that would be paid by any other person.

In terms of other property, which includes residential, to avoid the punitive tax charges imposed by HMRC’s Taxable Property Rules, a pension fund cannot invest in any property that is “suitable for use as a dwelling”. This generally means all residential property and includes holiday lets, “time shares” and similar arrangements.

Neither the approved or residential lists above are exhaustive. There can be situations where exceptions are made and we would always strongly suggest that you speak with the pension trustees prior to starting proceedings.

Property that is already owned by the individual can be purchased into a pension fund, but the property must be sold to the pension fund at a market value. Commercial property can be purchased with other property investors; however there are certain restrictions and several ways to deal with this.

For example, a Group SIPP or SSAS product where investors become members of the same pension fund and pool funds to purchase the proposed property. This may give access to an asset class that would otherwise not be cost effective individually, since the costs of purchasing and running the property within a pension scheme is divided between the members.

Subject to a willing lender, pension scheme trustees can borrow up to 50 per cent of the net asset value of a scheme to assist in the financing of property purchase or development. Borrowing can also still take place after the member has commenced drawing benefits.

Borrowing is not restricted to banks and other lending institutions. With the agreement of Taylor Patterson, sums can be borrowed from connected or third parties but it does have to be on a commercial basis under a formal agreement. Please refer to Taylor Patterson’s guide to borrowing.

A commercial property can be leased to the trading business, providing the business pays a market rent for the property and a commercial lease is put in place by an appointed legal adviser. The market rent will be provided by a professional surveyor. They will provide an open market rental commentary on the property in question, along with guidance on lease terms.

There are a range of costs that need to be considered when purchasing commercial property. In addition to the purchase price other costs include:

• Legal fees
• Valuation fees
• Survey fees e.g. environmental, asbestos
• Land registry fees
• Tax – Stamp duty land tax and VAT (if applicable)

If the property purchase occurs within a SIPP, all costs must be borne by the SIPP and should not be paid by the member or any other party.

The legal and other costs incurred by a SSAS, but not VAT or stamp duty, may be paid by the principal employer of the scheme in which case they can be left out of the calculations.

Please note, where the property purchase price is subject to VAT, the stamp duty land tax payable is based on the price inclusive of VAT.

When dealing with connected party transactions and transfers, transactions will be subject to stamp duty and VAT where applicable. Purchases from connected parties are disposals for capital gains tax purposes. The selling party should refer to their tax adviser for further guidance. Such transactions will be subject to the normal due diligence applicable to any property acquisition. Where a property is subject to VAT the member will need to appoint a person to handle the necessary VAT administration. Ideally this should be considered in the early stages of the property purchase process.