Options and overages on SIPP/SSAS commercial property

4 February 2025

If a SIPP or SSAS pension is considering purchasing or own a property with option or overage terms, what does this mean and of what should Paraplanners be wary? Caitlin Southall, head of SSAS proposition at WBR Group, explains.

 

Commercial property is an ever-attractive proposition for SIPP and SSAS clients. The tax advantages on offer include no capital gains tax when the property is sold from the pension, no income tax on the rental income received and a reassuring regular income stream aiding liquidity. If the tenant is connected to the pension member, there might be additional advantages in that the rent should be deductible from the trading profits of the business, culminating in a reduction in corporation tax payable.

There are some instances where you or your clients may come across a property that has either an option, overage, or a combination of the two, on the legal title. What are these terms and how do they impact the pension? We’ve explored this below.

Options:

Options give a person or entity a right to purchase the property in the event that certain triggers are met – this is known as ‘trigger event’. Commonly used for developers, the option grants the right to purchase for a defined period, and typically at a set price. In some cases, the option price may be market value for the property, from time to time.

For example, a client may grant an option to the occupational tenant, allowing them to purchase the property for market value in five years’ time, when the lease comes to an end. However, to be able to do this, there must be no rent arrears, and if connected, the value must be determined by a RICS qualified surveyor.

Overages:

An overage allows the grantee the ability to receive a share of future increase in property value. It’s sometimes referred to as a ‘clawback’ as is akin to a ‘sell-on clause’ in football. The trigger events for overages can vary, although I have most commonly seen the onward sale of the property, or the development of the property, being triggers for overage payments.

There can be a set payment due under an overage, or alternatively it could be a proportional amount of any uplift in value should planning permission be obtained or implemented. If the pension sells a property subject to a new or existing overage, then there could be a further payment due to the SIPP or SSAS later down the line. This may be administratively difficult in the event that the client transfers to a new provider during the period before any overage might be triggered.

A consideration perhaps unique to pension property investment, is in respect of those situations where the property benefits from an overage where the trigger event is the development of land or property for residential use. At the point that, there is a question as to whether the pension is receiving payment for residential property, which is therefore deemed ‘taxable property’ under Schedule 29A of the Finance Act 2004. Benefitting from taxable property is likely to bring about onerous tax charges on both the pension, and the pension member personally.

In my experience, providers will differ on their interpretation of these rules. Some might take the cautious view that the risk should not be taken, meaning that they would not accept the grant of any overage that is payable on residential planning permission, whilst the property is held within a SIPP or SSAS. Others might take a more relaxed view, deeming that the pension scheme’s interest is only due once the residential element has been sold.

If the pension is buying a property subject to an option or overage, this may present some challenges, dependent on the individual agreements and/or the pension provider facilitating the transaction. For example, if there is an overage, where the trigger is obtaining planning permission, the openness of this clause might concern providers, trustees and members alike. If the pension would be on the hook to pay an uplift in value to the unconnected seller, there is nothing preventing any third party from obtaining planning permission for the property held in the pension, therefore triggering the overage payment being due. A mitigation for this is to ensure that any trigger events are within the trustee’s control. Building on the previous example, if the overage provides that the only party who can trigger the overage by obtaining planning permission is the trustees, this removes a large amount of risk.

It’s worth noting that options and overages can be agreed at any point in time – it isn’t limited to only sale and purchase transactions.

Ultimately, it is vital that where a property is subject to an existing option or overage, that the provider is made aware of the terms as early as possible in the transaction. They may have certain requirements, such as the inclusion of a limitation of liability clause, or their own terms around what they can and can’t accept based on their interpretation of the regulations. Early advice from a solicitor to understand the terms or draft an agreement is essential to avoid poor outcomes for the provider/trustee, and the members.

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Professional Paraplanner