Finding property opportunities

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.

SSASs – like Sipps – may apply for VAT such that any VAT suffered on purchase or development/improvement of property can be reclaimed. A proviso is that VAT is then chargeable on rental of the premises.

Different mechanics

So far we have seen that SSASs and Sipps operate very similar acceptance criteria and, both being registered schemes, they have the same rules, have the same borrowing capacity, both can jointly acquire so whether a SSAS or Sipp is utilised will come down to individual circumstances.

It is here in the mechanics of processes that a SSAS can sometime hold an advantage over a number of individual Sipps.

It is common that with the restricted contribution limits and current maximum borrowing capabilities of only 50 per cent of the net value of a pension scheme, the scheme cannot afford to buy a property outright on day one. In such circumstances, a phased/joint purchase might take place with the pension scheme buying a proportion of the property and perhaps the company buying the remainder. This can be achieved by holding the property in a side trust, for the benefit of the underlying beneficial owners being the SSAS and company.

Where subsequent amendments in ownership are required, having a single trust SSAS is less administratively complex than having perhaps four individual Sipps.

The flexibility afforded by the cascading down of assets within a SSAS can also be advantage.

Where a family business has a SSAS holding the property from which the business trades it is obviously not ideal for the property to be sold when benefits need to come into payment. It is quite usual for the parents to have a greater proportion of the fund and thus a larger interest in the property. By using new contributions for the next generation to service benefit payments for the parents, the proportion the property can gradually be moved down a generation. While it would be possible for this to occur with individual Sipps, the process would be more complex and require cash movements between the Sipps effectively buying tranches of the property each time. Being that this would be a change of beneficial owner, transaction costs and stamp duty land tax would be payable on each occasion. However, within a SSAS, being a single trust, the ownership of the asset does not change. It is only the proportional ownership within the SSAS that needs to be amended by the scheme administrator.

Liquidity

A common misconception and on occasion a reason for not investing into it is that commercial property is an illiquid asset. Many believe it is either held or it is sold and that there is no in between.

Hopefully the examples listed above will have demonstrated that this is not the case, and another example of where joint ownership of property can be useful is where property is used in the payment of benefits in specie. A member of a pension scheme may have a total fund of £600,000 of which £300,000 is a farmed agricultural land, £175,000 in an equity portfolio, depressed due to market conditions with the remainder as cash.

There are advantages in holding the agricultural land personally in that Agricultural Relief may exempt the value of the land from the deceased’s estate on death and thus inheritance tax can be avoided. In this case the member was keen to get the land into his own name as quickly as possible but did not want to draw on the pension commencement lump sum (PCLS) from the equity portfolio as liquidation of it would have crystallised losses.

So instead it was possible to pay one half of the land value to him as his PCLS as an in specie payment, the land at that time being jointly held by the SSAS and the member. In subsequent years, additional tranches of land can be paid to him as net pension payments using the cash and recovering equity portfolio to cover the tax on the pension payments. The ownership of the land simply gradually moves from the SSAS to the member personally.

Individual circumstances will determine whether a Sipp or a SSAS might be the more suitable vehicle to hold property, but the SSAS does hold some aces up its sleeve.

Ian Stewart is joint managing director and pension consultant at Dentons Pension Management Ltd