Technical: Compliance with HMRC in SIPP connected tenant rent reviews
27 March 2018
John Keenan, corporate development manager, Xafinity SIPP & SSAS looks at the importance of ensuring connected tenant rent reviews are always on a ‘commercial basis’ to ensure compliance with HMRC.
Many SIPP & SSAS pension scheme properties have ‘connected party’ tenants, in our portfolio it is just over half, and it is easy for the tenant to overlook the fact that the property they lease is owned by the pension fund and not themselves/their company. Where rent is being reviewed the pension professionals (SIPP/SSAS provider and/or financial adviser) must ensure this is on a commercial basis to avoid any potential tax charges by HMRC.
Rent reviews allow the periodical adjustment of rent at the date of the review, which typically occur every three to five years. Rent is commonly negotiated between the landlord and tenant. Where both are unconnected the agreed rent is deemed commercial since the transaction has been agreed between a willing landlord and a willing tenant on an arms-length basis.
Where the landlord and tenant are connected, HMRC may not consider a negotiation commercial since the parties are not acting on an arms-length basis. In this instance, the pension professionals should consider taking guidance from a RICS registered surveyor, who will determine the open market rental value which, by definition, is commercial.
Pension professionals need to be careful when reviewing the lease to check the rent review clause provides for commercial rent.
Mr Clarke and Mr Davidson are members of a joint SIPP which owns a commercial property that is leased to their company Beta Ltd by way of 15 year lease. As the lease approaches its fifth anniversary the SIPP provider writes to the members flagging that a rent review is due as per the terms of the lease.
Having operated their business from the premises for 20 years before it was purchased by the SIPP and owned other businesses in the area for many years, both members feel that they have a good understanding of commercial rents for the area and are confident that the current rental amount is commercial. They wish to continue at the current level and don’t feel that a survey is required.
They confirm that to the SIPP provider who in turn directs them towards HMRC guidance that as they have a connected party tenant they must be able to evidence the commerciality. If HMRC found the rate not to be commercial then it would trigger an unauthorised payment charge of as much as 40% on the difference between what was paid and what should have been paid.
As the property was valued prior to purchase to determine the price, given it was a connected party transaction the SIPP provider suggests that the members contact the RICS Registered surveyor who carried out this previous valuation to ask for a short version of the report focussing on the rental amount only.
The members accept the guidance but, as it happens, Mr Clarke is considering drawing benefits and so they decide to opt for a full valuation, i.e. not just rental, which can then also be used to calculate retirement benefits available to Mr Clarke.
The property is valued and the surveyor confirms the rental amount which is slightly more than the tenant had been paying, but this isn’t all bad news. Higher rent payments mean that more money is paid into their joint SIPPs increasing the value of their funds and providing additional liquidity from which Mr Clarke can draw benefits. It also means that the company can offset a greater amount against their corporation tax bill.
Pension Scheme Implications
As already stated the pension professional should inform their clients that rent must be commercial and supported by a qualified person (eg RICS Registered surveyor). This means when the rent is reviewed at the rent review date the negotiation between the landlord and tenant is effectively based on the surveyors comments.
The connected tenant should be aware of this, however if there was a disagreement the SIPP/SSAS trustee (in its capacity as landlord) would generally trigger a dispute provision in the rent review clause, an example clause might look like this:
“The Market Rent at the Rent Review Date may be agreed between the landlord and the tenant. If they have not done so (whether or not they have tried) by the Rent Review Date, either the landlord or the tenant can require the Market Rent to be decided by an independent expert. If the landlord and the tenant do not agree on who should decide the Market Rent, the expert is to be appointed by the President of the Royal Institution of Chartered Surveyors on the application of either the landlord or the tenant. The expert will determine the open market rent and give written reasons for his decisions, which are to be binding on the parties”
This means a RICS surveyor would be appointed and so protecting the scheme by ensuring the rent is always on a ‘commercial basis’. Failure to meet this requirement can result in punitive tax charges.
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