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SIPP case study – how ‘wasting asset’ tax rules nearly scuppered this property purchase

Elaine Turtle, director, DP Pensions, describes a situation where a client’s proposed property purchase for his SIPP came up against the ‘wasting asset’ rules and how it was finally resolved

Some time ago we had a situation on a property case that you don’t see very often. An adviser we know well, Joe, came to us with a client, Mr Green, who wanted to purchase a commercial property that was in a business park and he wanted to do this through a SIPP.

As is quite often the case, in a business park, the property was leasehold. Joe gave us some figures as to the cost of the purchase and provided us with the amount the ground rent was at £40,000 per annum and stated that the expected rent on the property should be around £80,000 – £90,000 per annum – to be confirmed when the valuer completed his valuation on the rent. This was needed as the property would be let to Mr Green’s company and therefore as a connected party transaction, we needed to know what the market rent would be for the property.

We also needed to know how long the lease had to go, just to check if the numbers stacked up on the property, as the ground rent was quite high.

The information came back stating the lease had 54 years left to run. Based on the numbers, more income would be received, for what was being paid for the property and also what had to be paid out on the ground rent. Also, Mr Green wanted to improve the property which would mean at the next rent review the property rent would be more than the expected £80,000 to £90,000 per annum.

Wasting asset – tax charge

However, there was an issue that we had to raise with Mr Green and his adviser. Under current legislation pension schemes can purchase a wasting asset, but there will be a tax charge on having this asset.

A “wasting asset” has the meaning given by section 44 of the Taxation of Chargeable Gains Act 1992 and means an asset with a predictable life span not exceeding 50 years. Plant or machinery will always be deemed to have a life of under 50 years but so has leasehold property. As this makes having the property in a ‘tax free’ environment ineffective and dealing with the payment of the tax on a wasting asset we do not allow these types of investments in our schemes.

Mr Green stated that the lease was currently 54 years so what was the issue and he had spoken to the freeholder who had no issue in extending the lease, but currently Mr Green did not have enough funds in his SIPP to extend the loan. So Mr Green hoped that over the next four years the SIPP would have enough funds to extend the lease. We pointed out although we had four years to run before we hit the 50 year limit, we had no idea going forward if the freeholder would still sell or perhaps sell at a price then that the SIPP could perhaps still afford.

We explained that we needed to have the lease extended now before the purchase and to somewhere around 65 – 70 years at least.

Mr Green went back to the vendor and explained the issue for the SIPP and after discussions the vendor came back with a price he was willing to accept and would extend the lease so it had 75 years to run. The issue now was that Mr Green did not have sufficient funds in his pension and when he spoke to his bank they were not happy to lend in order for the purchase to be made with the lease being extended at the same time.

Mr Green was naturally disappointed and thought he was not going to be able to proceed with the purchase.

How the problem was resolved

His adviser discussed the matter with us and we found out that his wife, Mrs Green, had a small personal pension, but they had considered it too small to set up a SIPP and have a small share of the property, when initially considering the property purchase. We pointed out that as Mr Green had his own limited company, he could look at setting up a SSAS with both him and his wife as members. This would keep costs down as it would be more cost effective than two SIPPs and would mean going forward the property would be pooled, but they would each own a share of it.

The adviser went to review the amount Mrs Green had in her personal pension scheme and it was slightly more than we needed in order to extend the leasehold.

The SSAS was set up and pensions transferred in, the lease extended and the property was purchased.

It just goes to show that advisers are invaluable in the pension advice chain and without the diligent work of this particular adviser, there would have been a very disapppointed client.

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