Long before Sipps were a twinkle in the eye of the then chancellor Nigel Lawson, small self-administered schemes (SSAS) had been accepting property as pension investment assets for many years.
Up until 1991, it was possible for SSASs to hold residential property assets directly and provided there have been no material changes or alterations to the building; it is still possible to hold those old properties under transitional protections. Otherwise, apart from in exceptional circumstances, where strict HM Revenue & Customs criteria are met, neither SSASs, nor Sipps can hold direct residential assets.
Property has long been a favoured investment for individuals looking to take control of the assets held for their retirement provision and holding them within a pension vehicle makes good tax planning sense.
Not only is any capital gain on the growth of the property exempt from capital gains tax, but income received from rent is exempt from income tax. Property is also a tangible, asset that can be seen and touched and whose returns can be understood and seen by the regular rental payments over the course of ownership.
Of course, the asset class also has its downsides. Concentration of investment into a single or few separate properties does not afford much in the way of diversification and where a rental void exists, the ongoing payment of insurance premiums and local government rates can make the asset a liability.
But where commercial property can be considered, it can often be not only a good investment for a pension fund but also a means of aiding the development of the members’ business. History reflects that the majority of SSAS-owned property is leased back to the founder employer and on many occasions the purchase was from the founder, which at the time released funds to the business in exchange for the property.
The range of acceptable commercial property is wide and in principle, provided the asset is not residential, it can be considered for acceptance in a SSAS although care still needs to be taken to ensure that the asset does not breach the taxable moveable property rule.
Without exemptions
Examples of often declined properties include bed and breakfast properties that might include residential accommodation for the individuals running the business, wind farms, solar panels and land banking
Many SSAS operators are Sipp operators too and will apply similar risk analysis programmes on property before acceptance. However, a key advantage is that the holding of some commercial property, deemed as being a non-standard asset under the new Sipp capital adequacy rules, might require a Sipp operator to hold additional capital when the property is acquired. A charge towards this coverage might be made whereas a SSAS – not being subject to capital adequacy rules – would have no such requirement.
It’s not just complete property that can be held. Land can be acquired and developed, existing properties improved or extended to potentially improve yield.
