Home > News > 2002 > October 2002 > Property Investment in your SSAS or SIPP
Property Investment in your SSAS or SIPP
Andrew Hague from our Amersham office discusses the merits of property as an investment for a SSAS or SIPP.
Why invest in property?
With low interest rates and a depressed and volatile stock market, property is an attractive investment. It provides a balance to other assets with the prospect of tax-free capital growth and rental income. Furthermore, if your company's own premises are purchased, it provides it with a friendly landlord! However, it should be borne in mind that property is a long-term investment.
What is allowed?
Commercial property such as offices, industrial units, factories, shops, warehouses, agricultural or development land are all permitted. In recent times, the Inland Revenue have also confirmed that more specialised property such as hotels, pubs, guest houses, nursing homes and ground rents on residential property not owned by the member are acceptable.
What is not allowed?
Virtually all residential property including flats, holiday cottages and student accommodation, even if let commercially.
There are some exceptions for SSAS's such as property occupied as a condition of employment for instance a caretaker or where a shop and flat above are let to the same unconnected third party.
Who can a SSAS or SIPP buy from or sell to?
Both a SSAS and SIPP can transact with unconnected parties but cannot deal with members or their relatives.
A SSAS may also buy from or sell to the company that sponsors the pension scheme or another company in the same group in which case an independent valuation of the market value of the property must be obtained. This is not possible in a SIPP.
Joint ownership
A SSAS or SIPP can jointly own a property with another SSAS or SIPP, a limited company owned by a member or an unconnected third party. It cannot own a property jointly with a member or relative, a partnership owned by a member or a FURBS.
Care should be taken before buying a property with another party, as the pension scheme must have the power to trigger a sale if benefits need to be paid. Even with such a clause, the other party may not be able or willing to buy the pension scheme's share of the property and it may be difficult to find another buyer.
How can the purchase be financed?
This can be done with cash in the pension scheme, a transfer of existing pension arrangements into the scheme, new contributions or by borrowing from a bank or other lender.
How much can be borrowed?
There are different limits for SSAS's and SIPP's.
The maximum that can be borrowed by a SSAS is three times the average annual contributions paid over the last three years plus 45% of the net assets of the scheme. A SSAS can borrow from a bank, building society, sponsoring company or an unconnected third party.
A SIPP can borrow up to 75% of the value of the purchase/development cost of the property. Borrowing can only be in connection with a property and can only be from a bank or building society.
Security will need to be provided to the lender, which will usually take the form of a legal charge over the property being purchased.
Tenancy
Once purchased, the property should be let. For both a SSAS or SIPP, the property can be let to your company, as long as the rent is supported by an independent valuation. A formal lease will need to be drawn up, incorporating the rental to be paid.
Reporting
In a SSAS, the purchase or sale of a property, or the granting of a new lease must be reported to the Inland Revenue within 90 days. Barnett Waddingham will do this.
At present, property transactions in a SIPP do not have to be reported to the Inland Revenue, but it is likely that this requirement will be introduced soon.
VAT
If the property to be purchased is registered for VAT, it is worth considering registering the SSAS/SIPP for VAT, so that this can be reclaimed. The registration for VAT needs to be done before the property is purchased. The SSAS/SIPP would have to charge VAT on rent, and when the property is sold, and complete quarterly returns.
Stamp Duty
This will need to be paid by the SSAS/SIPP and can be expensive. Beware that if a property is subject to VAT, this can push the property into a higher stamp duty band.
Age restrictions
In a SSAS, there is no restriction on purchasing property if all members are not drawing benefits from the scheme. Where the SSAS includes a member over 70 in receipt of benefits, that member's share of the assets should not be used to purchase a property as assets need to be in liquid form to enable an annuity to be purchased by age 75.
In a SIPP, there are no age restrictions if the member is not drawing benefits. It is not possible to purchase property after age 65 if the member is drawing a pension.
Summary
Property can be an attractive investment for a SSAS or SIPP as long it is borne in mind that property is a long term investment, and there are various rules and regulations governing what is allowed.
Andrew Hague, October 2002.