Property investments are a constant presence in the world of self-invested pensions but very few can be classed as 'simple or standard', writes Claire Trott
In the ever changing face of self-invested pensions one thing has remained constant, is 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.
I talk to advisers about these issues all the time and there really are very few transactions that would be classed as simple or standard.
The first issue is determining if the property is allowable at all, as with many things regarding SIPPs, just because it is allowable by HMRC doesn't mean all providers will allow it and you should try and discuss all property transactions with the provider as early on as possible to ensure there are no nasty surprises.
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.
Fees can be a significant factor when thinking of buying a property via a pension scheme. The associated cost is something that needs serious scrutiny with regards to purchase fees and ongoing charges.
There is no standard format for property fees in a SIPP. 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 be sure you know about all the fees that will apply to your clients before you start the process or even establish the SIPP.
Ongoing fees can vary dramatically and depend on the services 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 SIPP providers will allow this, but it is best to check.
Over recent years some providers have placed restrictions on the amount and timing of the borrowing. It is important to remember that you can borrow up to 50% of the net value of the fund and that is only tested at the point the borrowing is taken out and not again unless further borrowing is needed. This means that there isn't a risk that the borrowing limit could be breached just because 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 SIPP provider it is possible to purchase it jointly with another SIPP, 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. For this reason, it is preferable that someone acts as the primary contact to collect and allocate the rental income between the various owners.
SIPPs really came into their own for property purchase and this really is still the main use for a full SIPP.
It is a complex area and early discussions can save many headaches down the road because many providers offer different services that suit different needs and you don't want to start the process somewhere you can't complete it.
Claire Trott is head of pensions technical at Talbot and Muir
Failure to engage
Ahead of 12 December general election
Tapered annual allowance headache
Scottish Widows report
Faces substantial prison term