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Case study: Mixed use property in SIPP and SSAS

Matthew Storey, business development manager, XPS Pensions Group SIPP & SSAS takes a case study of a client wanting to invest in mixed use property in their pension, and explains what the issues and solution would be.

Investing in property is still a popular choice among clients. We alone have seen the number of property purchases increase 38% last year compared to the previous year. This increase reflects the growing understanding that SME business owners and professional investors have of the tax efficiencies of property investment within SIPP and SSAS.

Frequently, we are asked by advisers for professional views on possible property investments they feel a little nervous about. These properties tend not to be simple warehouses, new build offices or the kind of property that is clearly ‘commercial’. They are mixed use and typically include a residential space above a retail or commercial unit below, in a high street town or city setting.

Quite rightly, many advisers have a cautious approach, as residential property is of course not a permitted investment for a pension. The challenge is that an ever increasing number of clients are business owners who have mixed use property like this, or are interested in property like this due to enticing factors such as location and price.

The good news is that there is a robust solution that can permit investment in mixed use property using a SIPP or SSAS. Let’s explore this further:

The scenario

A typical scenario would be, an SME business owner has found a new property on the market in their local town. The property is being offered on a freehold title basis and consists of a retail space at street level with a residential flat above. He has some pension benefits in a previous scheme but is not contributing to a pension at the moment and would like to address what he sees as pension shortfall. He is aware of self invested personal pensions (SIPPs) and wonders if one could be used to purchase the property and help build up his pension pot.

Both the flat and the retail space are empty and the client is planning to move in to the premises to use it for their business.

The property is valued at £250k, and the survey shows this to be equally split between both the residential and non-residential parts.

The issue

In its current form, a SIPP cannot purchase this property. This is down to the residential part which is not permitted as a pension asset. It can only purchase the non-residential part.

If the property was owned by a SIPP or SSAS, the value of the residential part would be classed as an unauthorised payment and highly punitive tax charges of up to 55% can be applied – something to be avoided!

In England and Wales, a freehold title includes all land and buildings above and below the property without limit. Although freehold titles can be split, this only applies to property adjacent or next to the property in question. Anything placed above or below cannot be split. Flats are a good example of this.

A solution

This is where it can become a little complex, however developing an effective plan and involving a solicitor early in this process can pay dividends going forwards.

The solution is to create a new leasehold title within the existing freehold title. This is done as follows:

2. An offer is made to the vendor to purchase the property for £250k

2. The valuation is carried out by a surveyor – this confirms the likely leasehold title value of the non-residential retail space

3. A SIPP is setup and funded from contributions/pension transfers from other sources

4. A solicitor is formally appointed by the SIPP to act on its behalf:

– Legal work commences to transfer the freehold title

– Simultaneously the solicitor creates a new leasehold title on the non-residential part of the property

– The freehold transfers to the client and the leasehold for the non-residential part of the property to the SIPP

– The SIPP releases £125k to the solicitor and the client releases £125k to the solicitor

– The vendor then receives £250k for the freehold title

In this solution, there are key factors as to why this works for all concerned. These include:

• The vendor sees one buyer, one offer and one payment

• The SIPP will become the leasehold title ‘owner’ of the permitted non-residential retail space

• The SIPP will have no ‘interest’ in the residential part

• The client can choose to retain the residential flat and let it out sell it on to another or possibly convert it into a new commercial/non-residential space – this gives business expansion options or the possibility of leasing out to other businesses.

In my view, there is huge opportunity for further growth in this sector, where tax benefits of using a SIPP or SSAS are compelling. Moreover, it’s crucial that SIPP and SSAS providers are flexible enough to support advisers and clients in finding and delivering innovative solutions that fall strictly within the rules.

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