Practicalities of SIPP/SSAS commercial property post Budget
Are the changes to stamp duty land tax combined with ongoing stockmarket volatility making commercial property ever more appealing to pension investors? Claire Trott, head of Pensions Technical, Talbot and Muir looks at the practicalities of using property in a SIPP or SSAS post the 2016 Budget
In the ever changing face of self invested pensions one thing has remained constant, the use of property as an investment in SIPP and SSAS. There are many issues when looking at investing in property and many transactions fall through because these were not identified at the outset. The very nature of property and its diversity means that few if any purchases can be classed as standard and straight forward.
Choosing the right property
The first issue is determining if the property will be suitable to be held in a pension, as with many things regarding pensions, just because it is allowable by HMRC doesn’t mean all providers will allow it and it certainly doesn’t mean it is suitable as an investment. Discussions with the pension provider early on in the process will mean that any additional requirements from the provider will be identified sooner rather than later. If a transfer from another scheme is planned to fund the purchase it would be sensible to discuss with the receiving scheme, before the transfer is processed, what the plans for the transfer are.
It is usually easy to determine if a piece of land or building is commercial or not. This is defined in the negative for pensions; it is commercial if it isn’t residential. It is residential if it is ‘suitable of use as a dwelling’ which basically means if you could live in it, then you can’t invest in it. This will usually mean that properties such as buy to let, holiday lets and bed and breakfasts will be ruled out even though they are used for a commercial venture. There are more grey areas such as pubs with residential parts and these can be acceptable subject to a number of restrictions.
Budget changes to Stamp Duty Land Tax (SDLT)
The 2016 Budget brought about a big change to the way in which stamp duty land tax is charged on commercial property, which changed the structure of the tax from thresholds to tiered. When the tax charge was on a threshold basis it meant that if you were only a few pence over the threshold the higher tax charge would be levied on the whole amount. Moving to a tiered approach means that the increase is more gradual with the increase only applying to the amount in each band. This makes any small increase in price less of an issue when looking at the overall cost of purchase.
The old thresholds meant that there was no stamp duty land tax paid on properties costing less than £150,000 and this remains the same but adding just a single pound would have meant a charge of £1,510. Under the new regime this would only be 20 pence (2% of the amount over £150,000). This difference varies as the amounts increase because of the way the changes work.
Take the example of someone with a property or land worth £249,999 including VAT, the old charge would have been basically £2,500 bar a penny (1% on the whole lot) but the new rates would be near on £2,000. Then tipping over into the next banding you have another sudden drop in the amount payable because previously where the cost was £250,000 and over, the whole amount was subject to 3% but under the new rules only the amount over £250,000 is subject to the new charge of 5%. The new bandings are shown below
BAND (Property or lease premium value) SDLT RATE
£0 to £150,000 0%
The next £1000 ( the portion from £150,001 to £150,000 2%
The remaining amount (the portion above £20,000 5%
Fees can be a significant factor when thinking of buying a property via a pension scheme. The associated costs is something that needs serious scrutiny with regards to purchase fees and ongoing charges. There is no standard format for property fees in a pension scheme. Some have a basic all encompassing fee and some have a low headline fee with a menu of supplementary charges, and then there is everything in between. One isn’t necessarily better than the other, but ensuring they are clear at outset will make it easier for the client to understand, with no nasty surprises.
Again, ongoing fees can vary dramatically with a broad spectrum of services being included. Some providers will undertake to do the property management or insist on the use of their own property manager, whereas some will allow the client to self manage or appoint their own manager. This could be a make or break issue for the client as many want to be hands on and manage the property personally.
Borrowing and part ownership
Many clients will need to borrow in order to purchase their chosen property outright and the majority of pension providers will allow this but not all and some will have specific restrictions above and beyond HM Revenue and Customs rules. It is important to remember that it is possible to borrow up to 50% of the net value of the fund and that is only tested at the point the borrowing is put in place and not again unless further borrowing is required. This protected the borrowing from becoming unauthorised even if other assets drop in value.
If there still isn’t enough in the fund to buy the property outright, then subject to the agreement of the pension provider it is possible to purchase it jointly with another pension, individual or company. This can be accomplished in many different ways from a trust structure to just having both entities on the title deed. The rental income will need to be apportioned across the relevant parties to the purchase in accordance with the percentage owned so there are no unauthorised payment charges.
The changes to stamp duty land tax and the volatility of the stock market makes commercial property ever more appealing to pension investors. If providers are kept in the loop when investigating commercial property purchase it can make the whole process a lot easier and quicker in the long run. Working with providers, solicitors and lenders that understand the pension regime again will simplify the purchase and save advisers’ and clients’ time and effort in the long run.
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