When investing in property within a SSAS, it is important to ensure the correct steps are met before any works commence, says Martin Tilley, director, WBR Group.
Property investment within a small self administered scheme (SSAS) remains a popular choice for small business owners and entrepreneurs, with a number of them looking to develop land or property. Where this happens, there are some key considerations that must be taken into account.
There should be a clear and genuine benefit to the SSAS in conducting any property development. This would generally be by way of an uplift in the market and rental value of the property, but may also include making a property more marketable for sale or let. Evidence of genuine benefit will need to be shown through professional advice from a surveyor and the works must be of a kind for which a property owner would ordinarily pay.
The scheme should not pay for any property work that is the responsibility of a tenant under a lease such as decoration, tenant fit out works or general repairs. An exception to this might be where a surveyor has confirmed that the works would result in an uplift in the rent, and this is formally documented on completion of the works.
Insurers should always be provided with full details of any works prior to commencement as they may have requirements in respect of the work being carried out. This will also ensure claims are not invalidated.
Where the scheme is paying for substantial works, it is also important for the trustees to take tax advice as to whether the scheme should register for VAT and therefore reclaim VAT on the building work or development.
Work being undertaken by the landlord.
While overall responsibility for the scheme’s assets lay with the member trustees, it would be prudent to discuss any development proposals with the professional trustee and/or scheme administrator. Ideally, at least two independent quotations for the work should be obtained, with a schedule of the work to be undertaken, details of how it will be funded and valuation advice. The trustees can then consider and approve the development.
Where borrowing is required, prudence would suggest there be a cashflow projection, and a contingency and a repayment moratorium for the duration of the works. The lending should be secured prior to the start of any work.
For larger developments, the trustees should consider the appointment of property professionals such as an architect, quantity survey and an independent professional project manager. The latter being responsible for drawing up and/or acquiring the necessary procurements, warranties and other development related provisions and advice.
For developments in excess of £30,000, a joint contract tribunal (JCT) should also be strongly considered. These facilitate the process of delivery a building project and in simple terms set out the responsibilities of all the parties within the process and their obligations to each other. A JCT can prevent disputes and ideally would be draw up by or reviewed by a solicitor.
One final consideration, when developing or undertaking work on a property within a SSAS, is that the pension scheme is not permitted to pay for fixtures or fittings or anything that would be deemed tangible moveable property. This would create a tax liability. For example, interior fittings such as blinds or white goods, machinery or cold stores even if permanently fitted cannot be paid from scheme funds.
Tenant requests
Tenants are generally responsible for the ongoing maintenance of a property under the repairing covenants within the lease. The SSAS does not require consent for this type of work to be conducted, however, tenants may wish to carry out other changes or building work, such as fitting out works particular to its use of the premises, such as a hairdressing business installing washbasins. As this type of work falls outside the general repair covenant, the tenant may need to apply to the trustees for permission to undertake the work. Any work that is undertaken must not detrimentally impact on the value and marketability of the property and must be formally documented by way of a “Licence for Works” usually drafted by a solicitor. This licence will record the work that has been agreed and set out what happens at the end of the lease.
Requests from the tenant should be in writing, along with a schedule of works and the tenant’s confirmation that it will meet the associated costs. Where there is a mortgage secured on the property, the lender’s consent will also be required.
Residential property
The Government has recently simplified the planning process relating to the conversion of commercial property to residential. However, the legislation covering residential property in pension schemes has not changed, so full development or conversion to residential should not be undertaken within a SSAS as this would be deemed taxable and attract tax penalties.
Obtaining planning permission and selling with the benefit of this with an overage is however permitted, provided the SSAS never holds a direct financial interest in completed residential property.
It is easy to see why purchasing and potentially developing property within a SSAS remains popular, it is just important to ensure all the correct professionals are engaged and that the works carried out are appropriate and do not lead to a tax charge.
