Residential property and your SIPP or SSAS investment: What you need to know
For many pension property investors, the most attractive components of SIPP or SSAS pension schemes are the tax benefits. However, prior to embarking upon a purchase, it is advisable to consider how HM Revenue & Customs (HMRC) will classify the property. If a property is classified as residential – either now, or at some point in the future – this can have negative impacts on your SIPP or SSAS investment and increase your tax charges.
Understanding HMRC classifications and the risks and benefits of including property in your SIPP or SSAS is essential to achieving the maximum benefit. However, these classifications are not always clear cut. For example, you may have found a suitable property from which your business can operate, but part of the building is residential, and the seller wants to sell the whole building, not just the part you need for your business.
As you can see, SIPP or SSAS investments which include a residential element are not always straightforward, however this is not to say that they should be discounted altogether.
Let us begin with the basics:
Can a SIPP or SSAS invest in residential property?
The purchase of residential property by a SIPP or SSAS is not a permitted investment, so will not have the tax advantages that the purchase of a purely commercial property would have.
However, there are some other ways of achieving the purchase of the property you need for your business without compromising the tax efficiencies offered by SIPPs and SSASs, if the residential part of the property can be used in tandem with the business (mixed-use) or through separate but connected ownership. These are explained in more detail below:
Mixed-use: residential and commercial property in a SIPP or SSAS
Taking the first option of using the residential part of the building in conjunction with your business, if the residential part provides accommodation for someone as part of their employment in the business then the purchase by the SIPP or SSAS is permitted. The lease to the business, which is usually granted at completion, should contain clauses restricting the use of the residential parts to accommodation for an employee under a service occupancy and should limit the occupation of the residential part to the period the occupant is employed in the business.
Removing the residential component of your SIPP or SSAS commercial property investment
The second option may be necessary if the residential part cannot be used as employee accommodation, possibly because it is already owned by a leaseholder or is occupied by an assured shorthold tenant whose rent is welcome additional income.
In this situation a connected entity buys the whole building, subject to a long lease of the commercial parts at a nominal rent being carved out immediately before the purchase of the freehold. This results in the freehold being owned outside the pension scheme and the commercial parts being owned within it, thus avoiding adverse tax consequences for the pension scheme.
The valuation should provide the split of the purchase price between these two parts of the sale. If the residential parts are already sold on long leases the value of the freehold excluding the commercial areas will be nominal or very low. Stamp Duty Land Tax will also form part of the overall considerations, particularly bearing in mind the surcharge on additional residential properties, which can be complicated.
The practicalities of managing the building must be given full consideration at an early stage to ensure compatibility of leases within the building and full recovery of service charges. If the residential part of the building is already sold on a long lease, any new lease of the commercial parts of the building will have to be tailored to fit with the existing management and service charge arrangements.
The connected entity purchasing the freehold, whether an individual or a company, must be willing to take on management of a building which includes residential parts, bearing in mind the extensive legislation governing residential service charges. It may be important to ensure that any existing leases allow for the recovery of the cost of employing a professional managing agent to carry out this work, and thus avoid potential pitfalls and the related liability.
If you would like to discuss your SIPP or SSAS legal options with Steele Raymond’s specialist pension property solicitors, please contact JohannaHammersley@steeleraymond.co.uk or call 01202 983 300.Join the BPA today for as little as £45.00