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Joint and staggered purchase of property in SIPPs

Elaine Turtle, director of DP Pensions, looks at the options for joint and staggered property purchase by a SIPP and provides an illustrative case study

With continuing steady increases in property prices, despite the financial crisis, purchasing a property outright from pension monies isn’t always possible. So it is becoming far more common to see commercial property purchases done on a joint basis or indeed on a staggered basis.

Most bespoke SIPPs run by providers with property experience will allow the pension to purchase freehold or leasehold commercial property and land. This includes offices, factories, warehouses and shops as well as farm and development land. The SIPP cannot be used to purchase residential property or ground rents (even if it is to be converted to commercial use and planning permission for such a conversion has been obtained). The one exception to this rule is where the residential property forms part of a commercial property, such as a caretaker’s flat above a shop, where it is occupied by an unconnected employee, as a condition of his or her employment. Commercial properties with a residential aspect, such as hotels, guesthouses and nursing homes, are permitted as long as the policyholders, or a connected party, do not use the facilities other than at a commercial rate.

A commercial purchase property can be done jointly with other parties, including other pension schemes as well as with an individual, the business or others. The property will be held in trust with each participant being entitled to a percentage of the property value and rental income. This percentage is determined by how much each participant contributed towards the purchase price.

For clients that are developing a property, there is also the opportunity to do this in a staged manner. Many prefer to do this rather than transferring all the monies across immediately and it can also be a useful tool for advisers when bringing a number of SIPPs together to undertake a property development. It can take quite some time to undertake transfers from pension firms and so this is a useful tool.

Case study

Drawn Dreams is a firm based in the Midlands, consisting of 13 architects who need to move premises due to expansion and had an opportunity to be part of a new development where they would occupy the ground floor on a leasehold property and would be able to have a say in how their floor was designed, which was very important to them.

The 13 members are all different ages and have various pots of pension monies, which are all held in personal pension plans. The total cost of the property build, solicitor costs and stamp duty etc. came to just over £2,000,000. Each member was in a position to put £160,000 into their SIPP, some had more funds, but the idea was only to put in what was needed and keep the rest of their funds in the personal pensions.

The main issue for these individuals was that they only wanted to put funds into their SIPPs as and when it was needed, they didn’t want money sitting in the SIPP uninvested. The programme of the build was very clear as to when the payments would be required and also the build would have to be signed off as to the work completed, before further funds were released. The adviser firm involved had an issue in setting up this case, as a number of providers that were approached insisted that all the funds had to be in place before the build could start. While the client was happy to keep a small balance in the SIPPs, they did not want to have all the funds sitting there out of the market. The build was going to take over 18 months and they felt this was unnecessary.

It is possible to undertake a staggered property purchase, as long as all the plans, council approval and requirements are in place and have been seen by the SIPP provider. The plans also need to contain contingencies for the fact that costs may be slightly more than originally quoted. Based on all these numbers and the funds held in the existing personal pension plans and agreement should be reached and the purchase can proceed and more importantly for the members, the funds can then come into the SIPPs as they are needed.

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