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Technical: SIPP property purchase with gearing

13 July 2018

Paul Darvill, director, Talbot and Muir looks at the rules and benefits of purchasing a property through a SIPP, the ability to borrow against the pension and the tax situation.

Property purchase within a SIPP continues to be a popular choice with investors. Whether to assist individuals with their business expansion plans, or simply as a result of more property investors becoming aware of the potential to purchase bricks and mortar within a SIPP, interest within this SIPP investment sector remains as strong today as it ever has been.

Firstly, however, you should keep in mind that there are only certain types of properties that are acceptable investments to hold within a regulated pension scheme, such as:

  • Commercial property, including industrial units, offices, hotels, and certain types of permitted job related residential property.
  • Land, including agricultural property (but not including any residential accommodation, apart from where a specific exemption from the taxable property rules applies).
  • Property in the process of being converted from commercial use to residential, or vice versa, provided the property is not suitable for use as a dwelling whilst owned by the scheme.
  • Certain types of residential properties that have been specified by HMRC as being permissible investments, such as a hall of residence for students, or a home or institution for those in need of personal care by reason of disability, old age, etc.

It is also possible for a SIPP to borrow money to provide extra liquidity to assist with a property purchase. The borrowing does not have to be secured, although a high street bank is unlikely to offer an unsecured loan to a SIPP.

A SIPP is restricted to borrowing up to 50% of the net value of the scheme assets at the point the borrowing is taken out. Although a fall in the value of the SIPP may mean that at certain points during the lifetime of the loan this limit is exceeded, provided no additional borrowing is taken out the limit does not have to be re-tested. Re-financing existing borrowing, except where the terms of the new loan are substantially different, will also not trigger a test of the 50% limit.

If the 50% limit is breached (for example, where the SIPP takes out additional borrowing) the excess is treated as a scheme chargeable payment subject to a 40% tax charge.

A SIPP is able to purchase assets from the scheme member and connected parties (including connected companies, such as the member’s employer). However, it must be demonstrated to the satisfaction of HMRC that any such purchase takes place “at arm’s length”. In practice this means that the SIPP will have to purchase property from a connected party for its market value, as determined by an independent valuation. The same goes for the level of rent that the SIPP should charge a tenant with a connection to the scheme member.

Properties held through a SIPP have some attractive tax advantages, income received from the investment (i.e. rental income) is exempt from income tax, and any gains made on the disposal of the property by the SIPP are free from Capital Gains Tax.

On the death of the scheme member any cash funds raised by the sale of the property are also normally exempt from Inheritance Tax, along with any other pension benefits. The same applies if, instead of being sold, the property is transferred directly from the SIPP to the member’s beneficiaries.

However, the acquisition of property by a SIPP is treated as a disposal for money’s worth, so certain tax charges may be incurred at the point of acquisition. The vendors of the property may be liable for CGT/Corporation Tax on any gains made from the sale of the property to the SIPP, and depending on the value of the property the SIPP may be liable for Stamp Duty Land Tax.

If the property purchase is subject to VAT then the SIPP will also be liable for this additional expense, although the SIPP can be registered for VAT to reclaim any VAT paid. Provided the normal conditions are met, a SIPP can also accept a transfer of property as a going concern, which will mean no VAT is payable at the point of purchase.

The SIPP may also be required to charge VAT on rental income, and account to HMRC for the tax charged.

Property purchase within a SIPP isn’t as simple as it sounds and there are plenty of pitfalls for the member to avoid. That is why it is so important for them to use a regulated financial adviser and for the adviser to have a strong and trusted relationship with the SIPP administrator that they use.