Introduction
For the purposes of this article, I focus on the use of a SIPP (Self Invested Pension Plan) when investing in property. There are, of course, alternative forms of pension scheme for property investment, such as Small Self-Administered Schemes (SSAS). A basic guide to the differences between SIPPs and SSASs can be found here.
Typically, property will be held by a pension scheme operator Trustee for an individual member within their own SIPP fund. Otherwise, they can choose to collectively purchase a property together with other investors, individually or with other SIPP funds. Some providers permit syndicated arrangements for joint investment holdings, whether this is between SIPPs administered by the same provider or external providers or third parties.
There are many options available and whilst there remains the ability for property to be invested in a SIPP, some providers may be reluctant to accept certain types of property. This is due to the type or nature of the property or land and the additional administration burden this places on them or specifically the knowledge needed in order to facilitate on going and long-term management.
Any property investment must be considered carefully and with the correct independent financial advice at the outset to ensure that it is a suitable investment for retirement in the long term. Property will naturally be less ‘liquid’ than having cash in the bank, and this will need to be considered as part of any longer-term retirement planning, which is considered further below.
Types of Commercial Property for Investment
Most people consider the more typical types of ‘commercial’ properties when looking at investment, offices, shops, industrial units or warehouses. These are all standard types of property and often acquired because individuals would like the premises used for their business to be held within their pensions. However, these are not the only types of property which can ultimately be held invested in a SIPP.
In 2021, farmers and land managers managed 71% of the UK’s land. Agricultural land, whether used for crops and or livestock, arable or pasture can also be held in a SIPP. Equestrian property, whether that is secluded pasture, stables or larger working livery yards can be held in a SIPP. Around 1.1 million hectares of woodland in Great Britian is in private ownership and thus could be held in a SIPP.
Income
The possibilities for the type of property for investment are broad in theory, however what should always be part of any consideration is how the property will ultimately produce an income. As an investment for a pension scheme any property needs to be income producing. This means that whilst you could choose to buy a woodland within a SIPP, how this woodland produces value as an asset in any pension is a key consideration.
Using a woodland as an example, the land will require on-going management as part of the purchase. Woodlands come with their own regulations around any building or if there are particular types of trees present and how these can be felled. There may also be other rights, such as sporting or fishing rights which will affect the land. The SIPP Trustees will require a woodland management plan in place together with a formal arrangement as to whom will ultimately use and occupy the land. This will need to be supported by a valuation and specialist legal advice to ensure any arrangements take place commercially and at arm’s length.
Risk and Ownership
As mentioned, when a property is placed into a SIPP it is usually the case that this will be bought and owned by the Trustee Company for the pension provider. It is usual now that pension providers will have property owned in the names of the individual investors, although some still do support this model.
On the basis that the property will be held in the name of the Trustee company, this will entail the company being confident, not only that the property is a suitable investment for the pension scheme, but that the property itself doesn’t present inherent risk for the company, over and above a standard threshold.
Pension Scheme trustees will ordinarily require full and comprehensive due diligence to be undertaken against property to include usual commercial searches and extensive enquiries. Trustees can be less agile when purchasing properties when compared to individual investors as they rely extensively on legal and professional advice and must ensure there is robust and recorded decision making for all instructions. This can understandably lead to them taking a risk adverse approach to less than standard investment properties.
Tax Considerations
SIPPs can be used as tax efficient wrappers for the holding of land and property if utilised in the right way. However, moving forward investors should also bear in mind the Autumn Budget in 2024’s suggestion that inheritance tax thresholds, (which are the amount you can pass on when you die, before inheritance tax is due), are staying the same until 2030. However, from April 2027, pensions will no longer be exempt from inheritance tax. That means that inheritance tax may have to be paid on your pension when you die.
Currently, when you die, your estate will not include your SIPP. This means it will not be subject to inheritance tax at the normal rate of 40% for assets above £325,000. Your beneficiaries can receive SIPP death benefits as a lump sum or fixed income, subject to certain other conditions.
We don’t yet have the finalised legislation, so things could change. The government is currently conducting a consultation on the proposal and further guidance is expected – so watch this space!
Use a specialist
Utilising professionals to support decision making around property investment is always advisable, however when it comes to property investment within pension wrappers the importance of this cannot be emphasised enough.
Commercial Property can be complex but when investing these types of assets into a pension wrapper there are a lot more considerations. Choosing the right legal provider who has the specialist knowledge which applies to pension investments is essential.
Where can Goughs help?
Our team work across a number of different sectors, including agricultural and rural land, construction, land and development and commercial property leveraging key individuals and experience to enhance our proposition and advice.
If you would like any support of assistance, please get in touch with our Commercial Property team.
