Considering a property investment for your SSAS or SIPP?
Holding residential property in a SSAS or a SIPP in almost all forms is generally not a tax efficient investment for this type of pension scheme. Indeed, in my article Holding residential property in a SSAS or SIPP – what you need to know I explained that the tax charges for holding residential property in a SSAS or SIPP can be significant.
But what do I mean by 'significant'? I thought it would be helpful if we take a closer look at the different tax charges that could apply should a SSAS or SIPP be deemed by HM Revenue & Customs (HMRC) to hold this type of property.
What is residential property?
Let’s start by considering what is residential property? The obvious answer to this question is a main domestic residence. However, HMRC’s definition of residential property is wide and also includes other types of property suitable to be used as a dwelling, even if leased commercial, and land used in connection with a residential property, even if the land does not have a property on it. Therefore, it is not always clear whether a property will be deemed by HMRC to be residential without considering the specific details of the land or property.
There are also some types of property that are exempt from HMRC’s definition of residential property, for example hotels and student accommodation if they meet certain criteria. Guidance should therefore be sought from the SSAS Professional Trustee or the SIPP Operator before the property is brought into the pension scheme or before any development of land owned by the pension scheme is undertaken to establish whether the property will be a tax efficient investment.
"There are some types of property that are exempt from HMRC’s definition of residential property."
Holding residential property: case study
Adam is the sole member of a SSAS, which holds a piece of land. He is also the Scheme Administrator for the Scheme. He bought the land in 2010 and in 2015 he obtained planning permission on the land to build flats for student accommodation. Unable to find a suitable purchaser for the land with the planning permission he decided to undertake the development in the pension scheme. The development was completed in 2016 and the flats received a habitation certificate on 6 April 2016. Adam appointed a surveyor to confirm the market value of the completed development and the surveyor confirmed this to be £500,000 at 6 April 2016. This took the value of his SSAS to £600,000 at that date.
The SSAS Professional Trustee became aware of the completed development later that year. After looking at the details of the property, the Professional Trustee confirmed that the flats would not meet HMRC’s definition of a “halls of residence” (see - How can I hold student property in my SSAS or SIPP?) and would be deemed to be residential property. On this basis, the following tax charges would initially be due:
- An Unauthorised Payment Charge payable by Adam personally equal to 40% of the value of the property when it was “acquired” by the SSAS. This would be the date the flats were deemed to be “habitable”. In this case we will assume this is the date that the flats received a habitation certificate but in practise the flats could be deemed habitable at an earlier point than this, for example when the building work is complete or when the utilities are connected. Based on a property valuation of £500,000 and a habitation date of 6 April 2016 this would mean an Unauthorised Payment Charge of £200,000 for Adam.
- An Unauthorised Payment Surcharge payable by Adam personally equal to 15% of the value of the property when it was brought into the SSAS. The Surcharge is due because the residential property investment is greater than 25% of the value of the Scheme at the date the property was brought into the Scheme. Based on a property valuation of £500,000 this would mean an Unauthorised Payment Surcharge of £75,000 for Adam.
- A Scheme Sanction Charge payable by the Scheme Administrator equal to 40% of the value of the property when it was brought into the SSAS. This charge is reduced to 15% of the value of the property if the Unauthorised Payment Charge is settled. Based on a property valuation of £500,000, this would mean a Scheme Sanction Charge of £75,000 for the Scheme Administrator, assuming Adam settled the Unauthorised Payment Charge.
This brings the total initial tax charges to £350,000, or 70% of the value of the property at 6 April 2016. The price Adam’s SSAS paid for the land and the costs of the development cannot be offset against these tax charges.
The SSAS Professional Trustee explained that whilst the flats continue to be held in the SSAS further tax would accrue. Adam therefore decided not to rent out the flats but to sell them and in 5 April 2019 the flats were sold to an unconnected third party for £550,000. This resulted in the following additional tax charges:
- A Scheme Sanction Charge of 40% of the deemed income from the flats payable by the Scheme Administrator. Although Adam did not actually receive any rent from the flats, the deemed income is set at 10% of the market value of the property. It is accrued each year the property is held in the SSAS and based on the market value of the property at the date it became habitable and increased to the end of each tax year in line with the Retail Price Index. Based on a property valuation of £500,000 at 6 April 2016 this results in deemed income of over £50,000 per annum and taxes of over £64,000 on the deemed income over the three years the flats were held in the SSAS.
If Adam had received any rent for the flats whilst they were held in the SSAS the Scheme Sanction Charge of 40% would still apply to the deemed income unless the actual income was higher than the deeded income. In this were the case, the Scheme Sanction Charge of 40% would apply to the actual income instead.
- A Scheme Sanction Charge of 40% of the capital gains arising on the sale of the property payable by the Scheme Administrator. On the basis that the property was sold for £550,000, and assuming there were no sales costs which could be deducted, this would result in chargeable gains of £50,000 and a Scheme Sanction Charge of £20,000.
The total tax amounted to just over £434,000, or around 87% of the value of the property when it became habitable. In addition, Adam ran the risk of HMRC de-registering the SSAS and clawing back any tax reliefs and tax exemptions granted to the SSAS since the acquisition of the property, putting his pension savings at additional risk. These tax charges could have been avoided had Adam sought guidance from his SSAS Professional Trustee before carrying out the development.
"Tax charges for getting things wrong, even inadvertently, can be significant."
If you are considering a property investment for your SSAS or SIPP, do seek guidance from your SSAS Professional Trustee or SIPP Operator. Pension legislation is complex and the tax charges for getting things wrong, even inadvertently, can as I hope you will see from this case study, be significant.
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