One of the more interesting aspects of self-invested pensions is the ability to take more direct ownership and control over the business premises that the member’s company operates from. This gives clients more flexibility to tailor the property to suit their business needs – whether this is via an extensive refurb or a ‘ground up’ development.
However, it can be tricky to navigate the various requirements of each party involved, such as:
- The local council planning office
- The self-invested personal pension (SIPP)/small self-administered scheme (SSAS) provider
- HM Revenue and Customs (HMRC) rules
With the right approach in place it can be a relatively painless transaction – at least from the SIPP/SSAS and HMRC side of things.
Let’s look at a case study:
- Kenneth is a financial adviser looking to expand his business
- He has a sizable pension pot currently worth over £500,000
- He personally owns a plot of land that he would like to use to build a new office for his business
- The office spec is intended to be high to meet specific business/office lifestyle needs
For Kenneth there are two key drivers. Firstly, to build the office his business needs. Secondly, he wants to get the land/property into a pension scheme in order to benefit from the available tax advantages of owning a property in his pension, including:
- Capital Gains Tax (CGT) – the SIPP/SSAS is exempt from future CGT at the point of sale, which would not normally apply to any property value increase post works if owned personally or by his company
- Income Tax – the rental, received into the SIPP/SSAS, is exempt from income tax
Stage 1 – land purchase
The land purchase is quite a simple undertaking: the SIPP/SSAS provider carries out initial due diligence such as valuation checks and environmental & flood risk checks, and appoints a solicitor to carry out the required searches and property title purchase. This takes into account the purchase price being set on an arm’s length basis (to satisfy connected party concerns).
Stage 2 – development of the property
This is more complex. To make sure the development is carried out without a hitch, and to ensure any financial or legislative risks are capped off, the SIPP/SSAS provider would look to gather full information on the works to be carried out, such as:
- Details of the work to be undertaken (via a questionnaire)
- Architects plans
- A copy of the council planning permission
- Full detailed costings of the entire project
- A clear understanding of the VAT status of the land and the impact on the SIPP/SSAS cash flow for the project
- Confirmation of the contractor/architect/project manager involved
- Confirmation of whether any connected party is involved (along with the appropriate cost evidence when this is applicable)
- The appropriate legal contract put in place for the works (or appropriate JCT, or similar, agreement)
Most SIPP/SSAS providers will seek formal contracts to be put in place and some options include:
- Joint Contracts Tribunal (JCT) – are a set of pro-forma legal templates that can purchased and used for a variety of building works (ranging from minor works through to full development). There are also regional variants for use in Scotland (SBCC) and Northern Ireland (RSUA)
One off legal contract – alternatively a solicitor can be appointed to draft up, at a cost, a one-off agreement tailored to the works, and parties, involved
- Project manager contracts – alongside a JCT, or one off legal contract, there may also be a project managers’ own contract where they wish to formalise their own terms (over and above the main works contract)
Luckily, Kenneth had a very knowledgeable quantity surveyor involved from day one to not only assist with the planning application with the local council, which was useful due to the tricky planning consents involved with the location of the plot, but to also assist in supplying the SIPP/SSAS provider with the copy items required to give comfort the planned transaction could be completed without any undue risk to his pension fund or the provider.
Payment of Invoices during build project
In terms of paying bills there are some pitfalls for a major construction like this. The SIPP member or SSAS trustees needs to be wary of the following:
- The pension fund cannot pay for any items that could be deemed tangible movable property, and therefore taxable items within HMRC rules, such as furniture or ‘white goods’
- The pension fund needs to meet all of the ‘fabric of the building’ costs as the property owner
- Where there are mixed costs, between landlord’s construction (SIPP/SSAS) and tenant fit-out, it’s important that the appropriate party pays only their own share of the costs (where the tenant is a connected party). Where any other arrangement is agreed upon, it would need to be supported by a surveyor’s comment, to demonstrate it’s on an arm’s length basis
The outcome was that Kenneth ended up with a superb purpose-built premises. He’s a model tenant, never keeping his landlord waiting for rent, his pension scheme owns this valuable asset and benefits from regular rent payments. All of this builds up to a very tidy sum, tax free, for the day Kenneth decides to undertake the whole new adventure of retirement.
Jeff McGinty is senior technician at Xafinity SIPP & SSAS