Care must be taken when developing a property within a SIPP, points out Jess List, pension technical manager, Curtis Banks
If you have ever watched property renovation shows, you may already be familiar with the idea of ‘flipping’ properties. It’s simply the concept of buying properties, making some quick improvements, and then selling them on again relatively quickly for a profit. This can be done with all kinds of commercial and residential properties and might involve anything from full-scale renovations of buildings through to more minor improvements such as replacing flooring and windows.
While flipping properties – also known as property trading – might sound a potentially attractive proposition, this unfortunately isn’t the case if the properties in question are to be held in a pension. While commercial property investments are very popular in products such as SIPPs and SSASs, property trading is not deemed a suitable activity for pensions, which are intended to be long-term savings vehicles that hold investments of longer-term benefit to the fund. Where property trading is undertaken with commercial properties in pensions, it could be deemed a form of ‘taxable property’, which incurs heavy penalties in the form of HMRC’s unauthorised payments charges.
Unauthorised payments charges may arise in a variety of contexts, but the types of charges remain the same and fall into three categories:
- The standard unauthorised payments charge of 40%
This is the standard charge which would apply to any type of unauthorised payment. In the context of commercial property trading, this would mean 40% of the value of the property (or properties) in question, as well as 40% of any deemed income from the property and of any capital gains.
- The unauthorised payments surcharge of 15%
This additional charge only applies if the value of the unauthorised payment (i.e. the property value in this context) is worth more than 25% of the individual’s pension rights. As commercial property investments often take up a significant portion of a person’s pension, it’s perhaps more likely for the surcharge to apply to an unauthorised payment resulting from property trading than it is for other types of unauthorised payment.
- The scheme sanction charge of 15-40%
This is the most complex of the charges. It’s a 40% charge which applies to the scheme administrator; however, it can be reduced if the normal unauthorised payments charge is paid. Assuming it is paid in full, the scheme sanction charge is reduced to 15%. While scheme sanction charges apply to the provider, in practice providers are likely to charge them back to the pension holder, unless the provider is responsible for the unauthorised payment arising.
This isn’t to say that it isn’t possible to develop commercial property within a pension: in fact, it’s a very popular course of action among property investors. The minimum energy efficiency standards (MEES) regulations are already requiring property owners to increase or maintain their energy efficiency ratings in order to let their properties to tenants, and more stringent MEES regulations are due to come into effect in 2023. As such, it’s likely that development work on properties held in pensions will only become more popular over the coming years. It’s important to remember that property developments within pensions have to meet certain regulations, so property investors need to ensure they follow the processes and requirements the providers have in place.
Developing properties can have a range of benefits, from increasing the property’s capital value, to attracting better tenants and commanding higher rental income. However, clients and their advisers will need to take care that their investment intentions fall within the regulations and would not be classed as trading, incurring the above charges as a result.
This article was first published in the April issue of Professional Paraplanner
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