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I came across a blog written by my colleague, Lisa White, on student accommodation as I was tucking into my Waldorf salad one lunchtime. I have her to thank for the inspiration to write this blog. An interesting element of my job is to keep abreast of HM Revenue & Customs (HMRC) rules on permitted hotel investments within SIPPs and SSASs.
I can see the appeal of such an investment. Rental income received by the SIPP or SSAS is exempt from income tax. Also, any capital gain the scheme makes — if and when selling the property — is exempt from capital gains tax. Furthermore, hoteliers can utilise sale and leaseback rules to generate a cash injection for their business.
What constitutes a hotel in a SIPP or SSAS?
A hotel can be treated by HMRC as commercial property, despite the observation that people will usually be residing there for a limited period. However, you should carefully consider if the investment meets the definition of a hotel. For example, a single institution offering nightly accommodation and meals to residents is a hotel. Whereas a ground floor restaurant does not prevent a first floor flat directly above it being treated by HMRC as residential property, with all of the resulting tax charges.
Hotels can be a perfectly viable and tax efficient pension scheme investment, provided the ownership criteria is satisfied. This can be outright ownership of the entire hotel. Or it could be part ownership of the entire hotel with, for example, the sponsoring employer of the SSAS. An important note here is that part ownership of the entire hotel is not the same as outright ownership of part of the hotel.
The perks (and tax charges) of hotel ownership
Another important aspect is whether a pension scheme’s investment in a hotel carries rights of use for the scheme members. Schedule 29A of the Finance Act 2004 is quite clear that both of the following situations would make the investment a residential property and hence incur tax charges:
- Ownership of part of the hotel (say, one room) leading to the right of a person to occupy that room, or any other part of the hotel; or
- Timeshare rights in the hotel, (for example, the right to stay there for two weeks every August), even where an arrangement allows the person to exchange these rights for accommodation anywhere else in the world.
Of course, you do not have the ‘right to occupy’ a room if you can only stay there when it’s vacant and you pay the going rate for occupying it.
Can you buy overseas property in a SIPP or SSAS?
The occasional queries we receive about investing in overseas commercial properties via a SIPP or SSAS appear relevant here. Our SIPP and SSAS arrangements only permit property investments in the UK, or overseas territories in which English is the primary language, UK trusts are recognised and a land registry exists similar to that in the UK.
Countries where English is the primary language generally have legislation structured in a similar way to the UK. This aids our understanding of any potential property related obligations or liabilities that might exist in that country.
Some countries do not recognise trusts or maintain a land registry similar to the UK’s. That can make it difficult for a SIPP or SSAS to own property there, to safeguard it, or evidence ownership of it.
Therefore, a hotel in Barcelona would not be an acceptable asset, even if it does serve a great English breakfast! On the other hand, a commercial property in the Channel Islands would potentially constitute an allowable investment in our SIPP or SSAS.
Other considerations when buying overseas property
Additional requirements must also be satisfied. This includes the appointment of a local solicitor and property manager to act for the SIPP or SSAS. It is essential that a local solicitor is appointed to provide advice on property ownership in that country, including any taxes that might be payable.
"Whilst income and gains made within a SIPP or SSAS on UK based investments are generally tax free, that is often not the case with overseas investments where local taxes may still apply."
Appointing a local property manager also helps with managing, administering and safeguarding an overseas property, where the SIPP or SSAS trustees will not have any local presence.
Where we act as professional trustee to a SSAS, we will consider overseas commercial property investments, excluding land, subject to the above requirements being adequately satisfied.
Avoiding pension scams
My piece on hotel based pension investments would be incomplete without mentioning pension scams.
The Pensions Regulator and Financial Conduct Authority cites exotic sounding and/or overseas based hotel developments as a potential warning sign — and with good reason. Other warning signs include pressure to sign up quickly to avoid missing out and ‘guarantees’ of significant investment returns. Further information can be found here.
Some self-invested pension scheme providers have gone into administration with large compensation claims. This happened, for example, because they allowed clients to invest their savings in development projects for hotels that were never even built.
This is a particular concern for SIPPs, where there is a ‘contamination risk’. It’s important to point out that the SIPP operator entering administration could freeze the assets of all of its clients — even those who did not invest in such a project.
For more information about any of the topics discussed, please contact your usual Barnett Waddingham consultant or get in touch here.
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