The property will continue to be “suitable for use as a dwelling” but the permitted “job-related” exemption from treatment as residential is no longer met when occupation ceases, potentially creating significant tax charges.
Other specific circumstances where HMRC has decided that residential property is okay include:
- prisons;
- hospitals;
- homes or institutions providing residential accommodation for the care of children, the elderly, the disabled or those with mental health issues or drug or alcohol dependency issues;
- halls of residence for students.
Care is needed even with these, particularly when considering those last two options.
HMRC has specific expectations for properties of these types which are beyond the scope of this article.
However, I have seen several investments linked to properties of this type marketed as “Sipp and Ssas-compliant” where it appears those promoting the investments are not aware of HMRC’s expectations – buyer beware.
Using borrowing to buy a property
Pre A-Day, Sipps and Ssases could only borrow funds to purchase commercial property.
That restriction no longer exists, but borrowing is still primarily used for the purchase of commercial property.
It is a valuable option because it potentially allows funds in the scheme to be used for other investments.
The maximum limit on borrowing is 50 per cent of the net value of the pension immediately before the borrowing takes place.
This sounds a simple calculation but the treatment of existing borrowing has caused confusion over the years.
A quick example may help:
| Assets | |
| Cash and non-property investments | £100,000 |
| Existing commercial property | £200,000 |
| Existing borrowing | £50,000 |
| Net value of pension | £250,000 |
This scheme has a net value of £250,000, which might make it appear the maximum amount of borrowing allowed at this point is £125,000.
However, because the scheme already has outstanding borrowing of £50,000, the maximum amount of new borrowing is reduced to £75,000.
Key points to understand are that:
- existing borrowing reduces the net value of the scheme, and
- it also has to be taken into account when working out the maximum level of new borrowing
Potential issues
We have talked about a number of the opportunities associated with Ssas and Sipp commercial property investment.
In the interests of balance we should also cover some of the key potential issues.
Let us look at tax concerns first. Residential property is not the only area where tax risks exist.
Tax is also incurred if the pension scheme invests in what HMRC describes as ‘tangible moveable property’ and also if transactions involving a property (purchase/sale price and ongoing rent payments) which take place between connected parties are not carried out on an arm’s length basis.
TMP becomes a potential issue where the scheme member(s) do not understand that the pension is only allowed to buy the property itself, not the fittings contained within it. Purchases involving premises like restaurants are notorious here.
The parties looking to purchase the restaurant are typically those involved in its running and often come into the transaction expecting to be able to use their pensions not only to purchase the building, but also to fit out the kitchen, bar and front of house.
The vast majority of these items will be TMP meaning the pension can not buy them or, if it does, it gets hit with large tax charges.
