Property has always been seen as a good and generally safe investment. This is perhaps why many SIPP and SSAS pension schemes invest in properties.
The one catch however is that holding residential property in your SIPP and SSAS will attract a 55% punitive tax charge and it will result in the scheme administrator being liable for a scheme sanction charge on both the income from the taxable asset and the capital gains at their disposal. On this basis, investing in a residential property does not seem like a good idea!
What are the options if you want to put your property into your SIPP or SSAS but it’s a retail high street shop which includes residential accommodation upstairs?
It is possible to structure the transaction to ensure that what the SIPP or SSAS owns has no residential element.
For example, Mrs Jones owns the freehold in a retail shop with a flat above it. She wants to put some property into her SIPP. In order to do this, she would retain the freehold interest in the whole property and then grant a 999-year lease of the ground floor retail shop to her SIPP. The SIPP would pay the market value (as determined by an independent valuer) for the 999-year lease to Mrs Jones.
The SIPP would then grant an occupational lease of the shop to Mrs Jones so that she could continue to trade from the property. The upstairs residential flat would be retained by Mrs Jones either for her own personal use or to rent out to a third party. The SIPP would have no involvement at any time with the upstairs flat.
What if Mrs Jones didn’t already own the property – can the transaction still be structured like this?
Yes – the difference would be that Mrs Jones would first purchase the whole of the property then immediately she would grant her SIPP the 999-year lease of the commercial part of the property. Her SIPP would pay her the purchase price for the 999-year lease (determined by an independent valuer).
This would all happen simultaneously so that the money paid by the SIPP to the Mrs Jones could be used by her to pay the purchase price for the whole property to the seller.
It is important to bear in mind that Mrs Jones would obviously need to ensure that she had enough funds to purchase the shortfall i.e. the value of the freehold plus the residential part of the property. Therefore, additional finance may be required.
Other points to note:
Maintenance of the Property
As a lease of part is being granted to the SIPP/SSAS the landlord (being the member in their individual capacity) would retain the responsibility for maintaining the exterior and structural parts of the property. Therefore, the member must be comfortable with this added responsibility. The SIPP/SSAS also need to be aware that there will be an additional provision in the lease which will allow the member to recover the cost of maintaining the exterior/structural parts of the property from the SIPP/SSAS. Therefore, there might be a formal ‘service charge’ payable or the costs could be charged on an ad hoc basis.
Management of Residential Tenants
As the member (in their individual capacity) is retaining the residential element of the property, they need to be comfortable and appreciate that it will be for them to deal with any residential tenant. This is particularly important in view of the fact that managing residential ASTs has become increasingly regulated and can be difficult to navigate for the unwary landlord.
Stamp Duty Land Tax
Where a mixed-use property is being acquired rather than previously owned by a member there may also be additional stamp duty land tax (SDLT) implications (depending on the purchase price). The reason being that the member (in their individual capacity) will have SDLT liabilities when they purchase the whole freehold from the seller and the SIPP/SSAS will also have SDLT liabilities when they purchase the 999-year lease from the member. Whether or not SDLT will be payable will depend on the purchase price. Use the Gov.UK calculator to see if SDLT will be payable on your SIPP or SSAS purchase >
Commercial Property which has a residential element
It is important to note however that there is a distinction between a mixed used property where the residential element is completely separate to the commercial part of the property and property where there may be some residential element but this is only as a result of the commercial use of the property. For example, a care home or a pub which may have some staff accommodation.
Generally, pension scheme providers will be happy for these types of properties to be invested in however they will insist that the occupational lease to the tenant makes it clear that the accommodation can only be used by a staff member to facilitate them working from the premises and for no other reason. Sub-letting of the accommodation on its own would be strictly forbidden and the SIPP/SSAS would have the ability to forfeit the lease if the tenant was in breach of these covenants.
Is investment in residential property ever possible?
It is worth noting that it is still possible to gain exposure to residential property within a SIPP/SSAS through investment in a collective vehicle such as in a real estate investment trust, however, be aware that not all SIPP providers offer access to property funds. As we are not independent financial advisors should you wish to go down this route, we would strongly suggest that you speak to your own IFA about this.
If you would like to discuss your legal SIPP or SSAS options with our specialist pension property solicitors, please contact Johanna Hammersley or call 01202 983 300.
