Pensions  

How to prevent property pitfalls in pensions

 

Any property investment can be attractive but advisers need to know the restrictions and tax liabilities that might arise if clients wish to put property into a pension, a specialist has warned.

According to Robert Graves, pensions technical specialist for Rowanmoor, said the firm had seen "quite an attraction" for people to use a pension to invest in commercial properties.

"A real attraction we have seen is where small business owners are wanting to put their own commercial property into a pension, and there are some significant tax advantages to this", he told FTAdviser.

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All the range of pension schemes - self-invested personal pensions (Sipps), Family Sipps and small, self-administered schemes - can invest in commercial property.

That said, not all Sipps will allow property investments within them, and some do not allow particular types of property, such as land, so advisers need to know which providers and which type of Sipp might be most suitable for their clients.

Then there are the intricacies of what sort of property might be appropriate, and which might have hidden tax consequences.

He warned: "There are issues to look out for, and advisers would not be coming across these sort of situations daily, so they might not be familiar with all the ins and outs of dealing with a commercial property within a pension arrangement."

He explained, for example, there could be grey areas with pensions and property legislation. Mr Graves said: "There is property law and there is pensions legislation" and sometimes these overlapped.

Mr Graves said: "For example, there are horrendous tax charges if you do invest a pension into residential property.

"So we only look at commercial property, for example, but even then advisers have to be very wary as to whether there is any element of residential property within a commercial property arrangement. The legislation does not actually define what residential is.

"It might seem obvious - we know what a house looks like, for example. But there are grey areas. What the pensions legislation says is there could be tax charges if you invest in a property that is 'suitable for use as a dwelling'.

"And there is no technical definition for this. If you have a scheme wishing to invest in land to develop, say, residential property, you have to consider when the scheme has to get rid of that investment so it does not end up owning something that can eventually be suitable for use as a dwelling."

Mr Graves warned that advisers should also consider the small print when it comes to commercial properties that might have some residential element attached to it.

He added: "Also, HM Revenue and Customs, for pension purposes, says even if there is only a tiny bit of residential as part of bigger commercial premises, then it would consider a pension scheme to be investing in a residential property, and tax consequences would apply."