Sipps were introduced in 1989 by Joint Office Memorandum 101 and included in the list of acceptable ...
Sipps were introduced in 1989 by Joint Office Memorandum 101 and included in the list of acceptable investments was commercial property. This was a major step forward for personal pensions and removed one of the fundamental differences between Sipps and SSASs.
Commercial property has always been attractive both from a pure investment point of view and from the point of view of an individual paying rent to their own pension fund rather than a third party. The tax efficient structure of pensions has enhanced this appeal.
Between 1989 and today the extent of this facility has become clearer. Commercial property includes: offices, industrial units, factories and warehouses and agricultural land. There were also grey areas, like pubs, restaurants, nursing homes and hotels. Winterthur Life will however consider such cases individually on receipt of full details of the proposal.
All properties submitted to Winterthur Life are subject to individual consideration and acceptance. In most cases there should be no problems and the property will be acceptable. However, there are a number of factors to be considered for the non-straightforward cases.
Firstly, connected party transactions. These are strictly forbidden under JOM 101. The definition of 'connected' is set out in section 839 of ICTA 1988 and in broad terms includes family members, fellow directors of a company, fellow partners of a partnership, companies which are controlled by the purchaser and connected trusts (for a full list reference must be made to the Act).
The Inland Revenue's concern over such transactions is that they may not be entirely commercial due to the 'connection' between the parties. In a similar way, care must be taken to avoid any conflict of interest if a solicitor or surveyor is involved in their professional capacity purchasing a property with their own Sipp.
Another Inland Revenue concern is that the Sipp holder may be able to use the property for private use rather than solely for commercial use.
This may be by virtue of the location of the property (for example, it may be next to the member's private residence) or by virtue of the nature of the property (for example, a hotel or restaurant).
In such circumstances, it is the 'commerciality' of the transaction that is of prime importance. It should also be noted that purchase of a commercial property must exclude fixtures and fittings and any amount for 'good will'.
Whilst commercial property is an acceptable investment under a Sipp, residential property is strictly prohibited in nearly all circumstances.
Like a SSAS, an exception may be made if the residential aspect is an integral part of the business and is needed in the course of the business (for example, a caretaker's flat or manager's quarters). In such circumstances we must be satisfied that the residential element is an essential part of the transaction, and that there is no possibility of beneficial use by the Sipp holder.
In some circumstances it is possible to develop land to be put into a Sipp. We have strict criteria as to what is acceptable. One of the main attractions of commercial property, particularly for partnerships, is that once a property has been purchased by the Sipp (or group of Sipps), it can be leased back to the partnership.
The rent paid by the partnership provides an investment return to the Sipp in a tax efficient way. The property can be leased back to a connected party as long as this is done on a strictly commercial basis.
This is particularly important where the tenant and the Sipp holder are connected and we will ask the surveyor to provide a rental valuation as part of the survey.
Affinity groups of Sipps
In some circumstances commercial property may be regarded as an attractive investment for reasons other than pure investment returns. It must be remembered that the Sipp is a pension arrangement set up to provide pension benefits and that as such all investments must be on a commercial basis.
Thus the Sipp must be set up before the property is purchased, and cannot be cancelled if the purchase does not proceed.
In a lot of situations, a commercial property purchase is effected not through an individual Sipp, but through a group of Sipps. This may be for a number of reasons. It may be because the property is too expensive for just one individual, or it may be that the property is being purchased by a partnership and each partnership is owning a 'share' within his or her own Sipp.
Normally, pooled property purchase takes place between affinity groups (partners in a partnership, directors of a company, members of a family, and so on). In effect, each member of a pooled fund (the property and any other assets alongside the property) proportionate to the amount that he or she has put in. This includes both contributions and transfer values.
Obviously, care must be taken with larger pooled property purchases to ensure that shares of fund, cash flow, etc, are appropriately calculated.
It is also important to understand how on one member leaving the pool (through retirement, transfer or death) a sale of the property can be avoided.
It is possible for a Sipp to borrow to facilitate a commercial property purchase. The onus is on the Sipp holder or their adviser to arrange a suitable commercial loan facility.
As in any property purchase, the purchase will appoint a surveyor and a solicitor. As purchaser, we will appoint a surveyor provided the surveyor is appropriately qualified we are willing to use a surveyor as requested by the Sipp holder.
We will always request a full structural survey and will reserve the right to request any further information to assist us in our deliberations. Part of this report will be a rental valuation to ensure that the rent paid by a tenant is at a commercial level. We will also need to appoint a solicitor to act on our behalf. We maint
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