RP case studies: Property purchase can be a family affair

Jessica List uses her latest RP case study to explore how a family can purchase property through their respective self-invested personal pensions

The Situation

Fred Jones owns and runs a shipping business with his son, Dan.

His daughter Julia isn’t involved with the family business; however, the three of them jointly own the business premises. They believe the property is worth approximately £400,000: Fred owns a 50% share and Dan and Julia hold 25% each. The three of them are considering transferring the property into their pensions.

The business is still growing and there is plenty of scope for development on the property. They all believe this could significantly increase its value in the future.

Fred’s main concern is capital gains tax (CGT). He is aware that if the property was within a pension, any growth in the value of the property, whether from development works or otherwise, would be free of CGT. His pension is worth approximately £700,000.

Julia has recently received a pension credit following the dissolution of her civil partnership, and was already considering property as an investment for the new funds within her pension, which in total is now worth £850,000.

Dan is 50 and has £150,000 in his pension. While he knows this isn’t a bad fund value, it isn’t where he would like it to be, and he is looking to increase his contributions over the next few years. He also feels as though holding the property in his pension could be a good way to boost his savings if the value does in fact increase.

The group also feel that the current split of ownership might not be the most appropriate going forwards.

Fred and Julia already hold SIPPs with a provider that facilitates commercial property investment, so they don’t need to transfer their pensions in order to complete the purchase. Dan will also be able to arrange to transfer his pension to the same provider.

Julia calls the provider’s property team to ask for more information about the process, and speaks to their representative, Veronica.

Veronica confirms that it will be possible for Fred, Dan, and Julia to use their SIPPs to purchase their property. She confirms that each will retain their own individual SIPP, and a share of the property will be assigned to each. Things such as rent, fees, or changes to the property value will be apportioned between the SIPPs according to the ownership split.

Veronica also wants to make Julia aware that there are some additional considerations due to the fact that the purchase is being completed between connected parties – in other words, the three individuals in a personal capacity, and their SIPPs. There are also additional connected party considerations as the tenant of the property will be Fred and Dan’s business.

Veronica confirms that the pension provider will be the legal owner of the property, and it must be able to demonstrate to HMRC that it acts as a commercial landlord would on the open market. Where there are connected parties involved, a provider must make sure that all transactions are completed at market value so that neither the individuals nor their pensions benefit unfairly from the connection.

When the SIPPs purchase the property, this means that the sale price must be determined by a professional valuer. The provider will also complete all of its normal due diligence checks on the property. Julia thinks her father may be unhappy about this, as he and Dan have owned and occupied the property for many years with no problems. However, she doesn’t think it will make him change his mind about proceeding.

Veronica explains that a valuer will also need to confirm a market rate of rent for the business to pay: Fred and Dan can’t simply agree a rate of rent for themselves. She also explains that although it would hopefully never come to it, if Fred and Dan’s business were to fail to pay the rent, the provider would have to pursue them for the money in the same way that it would for an unconnected tenant. In order to make sure HMRC’s rules are satisfied, it could not allow a rent concession without taking valuation advice. Julia promises to discuss this with her father and brother, but she is confident they will still want to proceed.

Finally, Julia explains the current ownership split of the property, and the fact that they would ideally like to change this at the point the SIPPs purchase the property. Veronica confirms that this is absolutely fine, and in fact, once the property is in the SIPPs, the group could also change the ownership split again in the future if they wanted to.

The Results

Dan transfers his pension funds to a SIPP with the same provider as Fred and Julia, and the group begins the process of purchasing the property from themselves.

The property is valued at £400,000 as expected. The three agree on an initial split of 20% for Dan, 45% for Julia, and 35% for Fred. This gives Dan the opportunity to diversify his pension while he builds up his funds, with a view to purchase more of Fred’s share over time.

Although Fred has no plans to retire in the near future, he feels that it is the right time to take a smaller share of the property.

Dan’s son, Alfie, has been working for the company and has expressed an interest in running it with Dan when the time comes, so Fred can also foresee a time when some of his remaining share is sold to Alfie.

Julia is comfortable with her larger share, and will be happy with any further changes of ownership her family requires going forwards.

This case study is part of Curtis Banks’s ‘Meet the Joneses’ series of intergenerational case studies.

Jessica List is pension technical manager at Curtis Banks