Once again we sat with bated breath – and once again, the word ‘pension’ failed to even get a mention. As ever, rumours around contribution tax relief were rife in the run-up to the Budget. The Government’s response to the Treasury Select Committee stating that there was ‘no consensus for either incremental or more radical reform of pensions tax relief’ seemed to rule out a full overhaul of the current system. However, this just made it seem more likely than ever that the chancellor would cut the annual allowance, and possibly change the tapered annual allowance to affect more high earners. I have to admit, I was more convinced than normal that changes were imminent, and as surprised as anyone when the speech came to a close without any hint of pension changes.
The only pension tax related announcement was confirmation of the new lifetime allowance for the 2019/20 tax year. Thankfully, the increase in line with the Consumer Price Index has been rounded up to the nearest £1,000 rather than the nearest £100 as allowed for in the legislation, meaning we have a slightly easier-to-remember new figure of £1.055m. It seems someone decided that four decimal places would just be taking things too far.
A closer examination, however, shows that there were a couple of positive announcements in relation to commercial property. These changes also have the potential to benefit SIPP investors holding commercial property, as well as their tenants – which may well be one and the same.
The change of most interest to tenants is likely to be the business rates discount for small retailers, which will apply from April 2019 and run for two years. The paper released after the Budget speech confirms that the discount will apply to certain occupied retail properties with a rateable value below £51,000, and states that up to 90% of retail properties will be able to benefit. Guidance will be published within the next couple of months to confirm exactly which businesses will be able to benefit.
More interesting for SIPP investors, perhaps, was the announcement that the Government will consult on ways to simplify the processes for converting commercial property into residential homes. It may seem counterintuitive to hail this as a positive change when SIPPs themselves cannot normally invest in residential property without incurring heavy penalties, but it does open up possibilities for SIPP investors.
For example, it may provide another avenue for SIPP investors when the time comes to sell their commercial property. If conversion to residential use is a new or more easily accessible option for the property, it may be attractive to a greater pool of buyers and therefore be easier for the investor to sell. If they want to sell the property at relatively short notice, perhaps in order to access pension benefits if there is insufficient liquidity within the plan before the sale, this could be very beneficial.
It’s also possible that some commercial properties with the potential to be converted for residential use may attract higher sale prices. This is already a consideration for some SIPP investors looking to sell, who may apply for the planning permission prior to the sale so that it’s already in place for a prospective buyer. This may become more prevalent if it becomes easier to develop commercial property for residential use. However, investors should contact their SIPP providers to discuss this process before making any changes. Residential property cannot be held within SIPPs without incurring heavy tax penalties (unless a taxable property concession has been implemented). As such, different providers will have different requirements. For example, it is not unusual for a SIPP provider to allow a commercial property to have residential planning permission, but require the property to be sold from the SIPP before any development work actually begins.
Another thing to note is that SIPPs aren’t able to permit property ‘trading’. This is the practice of repeatedly buying properties, making improvements which increase the value (which may include obtaining planning permission) and quickly selling them on. As pensions are a long-term savings vehicle, HMRC does not deem property trading a suitable activity within a SIPP.
Jessica List is pension technical manager at Curtis Banks Group