If a client wants to redevelop a commercial property held in their SIPP, what do paraplanners need to know? Stephen McPhillips, technical sales director, Dentons Pension Management Limited looks at the issues.
Commercial property acquisition through a self invested personal pension (SIPP) or through a small self administered scheme (SSAS) continues to be a popular choice for clients, including small industrial units, warehouses, offices, shops and public houses.
However, if a commercial property in its current form is not quite what the client requires, it may need to be re-developed either to suit the client’s needs, or to suit the needs of prospective tenants; the wider the appeal to a broad range of prospective tenants, the more likely it is that the SIPP/SSAS will find a suitable tenant willing to pay the desired level of rent.
Property re-development fundamentals.
The SIPP/SSAS provider: One of the first aspects to bear in mind is whether or not the provider of the SIPP/SSAS will actually allow this type of work. Some may only allow purchase of a property that is immediately capable of being occupied by a tenant. In fact, some may insist that a property has a tenant in situ at the time of acquisition by the pension scheme. Some providers may even have completely withdrawn commercial property acquisition from their propositions.
Planning permission: A key aspect of commercial property re-development could be the question of appropriate Planning Consents from the local authority; will the intended use for the re-developed property be acceptable to it?
If such Consent for change of use has not been obtained, and there remains some doubt that it will be forthcoming, a provider may wish to stipulate that any acceptance in principle to the proposal is contingent upon the relevant permissions being sought and obtained. This is because there is a risk that the property cannot be leased until re-development takes place, and if the property cannot be leased, it will not be generating any rental income for the pension scheme.
Also, if the property is vacant, the SIPP/SSAS will be responsible for areas such as the ongoing maintenance, insurance and rates. There is also the potential heightened risk of vandalism where a property is lying empty.
Occasionally, the intention is to re-develop a commercial property into residential property (or vice-versa). In these cases, whilst it is acceptable for the pension scheme member(s) to apply for the change of use Consent, great care needs to be taken to ensure that the pension scheme does not own the property at the point of it being classed/capable of being used as a residential property.
In practice, this can mean that the pension scheme sells the property with the benefit of Planning Consent (in the case of commercial to residential re-development) without having carried out any conversion work, or it can mean that a residential property is fully converted to commercial (with the appropriate Planning Consent in place) prior to acquisition by the pension scheme.
Funding the re-development:
Assuming that the appropriate Consents have been obtained, and that the property is fully commercial and is remaining so, the question then turns to, how are the re-development costs going to be financed?
It is possible, but perhaps not very common, that an existing tenant wishes the re-development to take place (to suit its business needs) and is prepared to fund the necessary costs. This would mean that the SIPP/SSAS as the landlord would not have to fund the re-development costs. Care has to be taken here, though, if the tenant is a connected party, because it should not be seen to be significantly improving the value of the property for the landlord at its own expense.
A substantial amount of re-development work funded by a connected tenant would have to be demonstrably commercial and be reflected in terms that an unconnected tenant would expect when dealing with the landlord. For example, this might mean a rent-free period to recognise the expenditure incurred by the tenant in re-developing the property.
A more likely scenario, however, is that the re-development work will be financed by the SIPP/SSAS as owner of the building. This being the case, it follows that the pension scheme needs to be able to fund the cost of the work. Once again, though, care has to be taken because the pension scheme cannot fund the cost of any tangible moveable property – things that can be touched and moved such as fixtures, fittings and furnishings that are not part of the fabric of the building. If it did fund any of these, tax charges could arise.
If the re-development works are extensive, a helpful provider may offer to scrutinise a schedule of works in order to outline which of those works could reasonably be funded by the pension scheme (as owner of the building) and which should be funded by an incoming tenant, as works required in order to make the property suitable for its occupation and intended use.
If the re-development work is being carried out by a connected party contractor, it would be necessary to obtain quotations from unconnected contractors to demonstrate that the price being paid for the work is market rate.
Whilst commercial property re-development through SIPP/SSAS is a possibility, much will depend on the nature of that work and the provider of the pension scheme.
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