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21st October 2020 - Samuel Martin

“Build, Build, Build” could cause tax issues for pension members

Boris Johnson recently announced that we need to “build, build, build” new infrastructure to help boost the UK economy. The relaxations of the planning system bring good news for the construction industry and house builders. However, this could cause tax issues for pension members holding commercial property.

An advantage of providing pension benefits in a SSAS or SIPP is being able to invest in commercial property, with the rental income and capital gains this type of investment may bring. SSASs and SIPPs can hold a range of commercial properties subject to certain criteria. This includes shops, offices and hotels. They can also be let to parties connected to the pension scheme, as long as the transactions are carried out at ‘arms-length’. However, residential property investment in almost all forms is not tax efficient.

The coronavirus lockdown is hitting the economy hard. Some companies are surviving, or even thriving, and are able to continue to meet their rental obligations to SSASs and SIPPs. In contrast, many business are struggling. Some pension scheme landlords are now facing rent deferrals, rent reductions and even looking at the prospect of their tenants going into liquidation. This would leave them with a vacant property, a business rates liability and property expenses to meet. As a member of a SSAS or SIPP if you have found yourself in this situation, the Prime Minister’s press release to “Build, Build, Build” may seem encouraging.

The New Rules

Under new rules, which came into effect in September, existing commercial properties may be able to be converted into residential property more easily. The proposed changes will include:

Full details can be found here: https://www.gov.uk/government/news/pm-build-build-build

Unfortunately, the relaxations to these planning rules do not have matching relaxations to the tax rules governing pension schemes. It remains the case that acquiring or developing residential property could cause tax issues for pension members in a SSAS or SIPP.

There are complications in determining what HM Revenue & Customs will deem to be residential property and the tax charges that will be incurred for holding residential property. Therefore, if you are considering making changes to the use of a SSAS or SIPP held property, or carrying out a residential property development, we recommend you talk to a financial advisor, professional trustee or your pension administrator before taking any action.

Pension scheme legislation is complex and the tax charges for getting things wrong, even inadvertently, can be significant. A professional trustee, the SIPP administrator or a financial planning firm like Herbert Scott may be able to help you achieve what you want to tax efficiently. Alternatively, they may confirm that your proposed plans cannot be achieved without incurring tax charges. Even knowing this at the outset can save you from being taxed adversely. 

Finally, it may be possible to approve requests for rent deferrals if appropriate in the current climate – even to a connected tenant, such as your own company. This may help with short term cash flow or profitability problems as a result of the Covid-19. It can also help the SSAS or SIPP keep its tenant in the long term. Again, a professional trustee, the SIPP administrator or a financial planning firm like Herbert Scott can provide guidance. If you have any questions, do give us a call on 01273 407500, or make contact via our website by clicking here.

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