In his latest guest blog for Investment Sense, Andy Leggett of Barnett Waddingham, takes a sideways look at investing in property via a self-invested pension.
Whether you recognise the term or not, you are familiar with CAPTCHA: when you have to read some mangled letters on a web page and enter them as part of a form, you are completing a Completely Automated Public Turing-test to tell Computers and Humans Apart.
What I recently learned was that the initial prototype used images but had to be abandoned because humans were so bad at the test! Since I work at a SIPP (Self-Invested Personal Pension) and SSAS (Small Self-Administered Scheme) provider and am paid to obsess about pensions, I can’t help but envision a CAPTCHA with an image of a property which web visitors variously described as “commercial property”, “SIPP-able property”, “residential property”, “taxable property”, “property that’s not technically residential”. Ok, contrived it might be, but the serious point is that we providers constantly see people show either too little or too much imagination towards property.
Commercial property in SIPPs
Awareness is generally reasonably high that SIPPs and SSASs are allowed to invest in commercial property. However, many people’s vision stops short of the full spectrum of property and ownership permutations that are possible. Most can conjure an image of shops, offices and industrial units. But rather fewer see other types like agricultural land, factories, petrol stations, sports facilities; in fact, anything that’s not residential (more on that later).
Nor do all see that the property can be one they or their business already own and that it can be contributed in specie. Then there’s the vision to borrow (up to 50% of the net value of the fund) and split ownership across multiple parties including other SIPPs, individuals and businesses. Few see such a wide definition of “commercial property”.
However, the biggest issue of interpretation is undoubtedly what looks like residential property. You may be surprised that residential property is not technically banned. However, punitive tax charges would apply on the purchase, income (rent) and any capital gain on sale which more than undo the tax privileges of a pension scheme.
Which is why most providers explicitly prohibit residential property in their SIPPs and SSASs.
Is residential property allowed in SIPPs?
The $64,000 question, then, is “What counts as residential?” It’s a vitally important one, too. You don’t want to show too much imagination and find out just how punitive the tax charges are; but nor do you want to miss an opportunity unnecessarily.
One commonly-cited, visible characteristic of residential properties is the presence of beds. However, “anything with a bed in it” is a poor rule of thumb. Picture, if you will, an image of property with beds in – say, student halls of residence, dedicated children’s homes, care homes (say, for the elderly or drug dependent), hospitals, hospices, prisons and similar institutions. HMRC have stated that, in this context, it does not view any of them as residential. Let’s try some new mental pictures: a pub with the landlord’s accommodation above it or a caretaker’s flat. Provided certain conditions are met, these “job related” premises are not classified as residential either – and I’m not hinting that the landlord sleeps on the floor!
You should note, however, that these exceptions are tightly governed: by no means do they form the thin-end of a wedge that opens up all and sundry. If you want to delve deeper, there is a dedicated page on the online Registered Pension Schemes Manual that sets out the conditions that a property must meet to qualify as halls of residence for students and examples of student properties that are simply residential. I have a mental image of ill-informed students gamely removing the beds from a buy-to-let and sleeping on the sofas in a vain attempt to qualify. Nice try but no chance!
It was buy-to-let that got many investors salivating in the run up to A-day and the late-in-the-day U-turn, applying tax charges on this and similar types of investment – on the grounds that there would be personal use of property and undue advantage gained from pensions’ tax privileges – that created the whole messy picture in the first place. All of which leads me to one last CAPTCHA that may surprise you.
Genuinely Diverse Commercial Vehicles
Our last image, to see if we can tell commercial and residential apart (or perhaps that should be tax authorities and other human beings) is one with numerous properties, all with bedrooms, bathrooms, running water, kitchens and all in a perfectly habitable state. They are owned by something HMRC call a Genuinely Diverse Commercial Vehicle (GDCV); you and I might call it a fund of some sort. SIPPs and SSASs can invest in GDCVs which can in turn own residential property. In CAPTCHA terms, properties which look like residential, are residential but don’t incur the residential property tax charges. Got it?
The types of funds which may qualify as GDCVs include Property Authorised Investment Funds (PAIFs) and Real Estate Investment Trusts (REITs). Other investment structures may also meet the conditions but PAIFs (which are open-ended) and REITs (which are closed ended) have the relative attractions of being listed and having high standards of governance required by law.
Image-based CAPTCHAs failed because there was far too much room for interpretation. When it comes to property in SIPPs and SSASs though, that room can be an advantage. You can find more information on investing in property in SIPPs or in a SSAS by clicking on the links.
Andy Leggett Head of Business Development, SIPPs at Barnett Waddingham can be contacted on 0844 443 0100 or by emailing firstname.lastname@example.org
The all-important small print (so important we’ve included it in bold!)
The value of investments can fall as well as rise. You may get less back than you invest.
We would recommend that individuals take independent financial advice prior to setting up a SIPP or SSAS, transferring from existing pension policies and making contributions or investments. We would also recommend working with a provider with significant experience, expert partners and strong due diligence when looking at investing in property in a pension.