SIPPs: 7 problems with buying overseas property in a SIPP


7 problems with buying overseas property in a SIPPBuying a commercial property in a SIPP has long been popular with business owners and property investors alike. However, the past few years has seen an increase in the number of unregulated overseas property schemes being marketed to UK SIPP investors.

We’ve seen a diverse range of property investments, from bamboo plantations to car parks in Dubai, land in far flung places of the globe, to hotel rooms in popular holiday resorts. Holiday lodges and log cabins also seem to be popular.

We believe that overseas, unregulated, property investments should be treated with extreme caution and having spoken to a number of SIPP providers we’ve put together a list of problems with buying property overseas.

1. Unregulated investments

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Our biggest concern about overseas property investments is that they are not regulated by the Financial Services Authority (FSA) and are often sold by unregulated salespeople.

We have seen some instances of regulated IFAs selling overseas property investments, which could mean the investor may be able to make a complaint against the IFA should the investment go wrong.

However, more often than not these types of investments are sold by unregulated salespeople, meaning that the investor will have nowhere to turn if the investment goes sour.

We would always recommend that you take advice from a UK based, FSA regulated, IFA before making any type of investment.

2. Trust rules

A SIPP is arranged under UK trust law, which can be extremely complex, even for UK based lawyers. Other countries may not have an understanding of UK trust law or pension regulations, indeed some countries do not even recognise UK trusts, which can be an issue when it comes to successfully completing the purchase of an overseas property in a SIPP.

For a SIPP to purchase an overseas property the legal team involved needs to understand UK pension rules, UK Trust law as well as the legal system in the country where the property is located.  In all likelihood they will also need to speak English!

Finding such a lawyer can be difficult and will no doubt increase the costs of the transaction significantly.

3. Tax complications

Each country has its own tax laws which need to be adhered to; this can cause issues when dealing with a tax exempt vehicle such as a SIPP. For example some countries levy a tax based on the value of a property, as the SIPP is tax exempt in the UK, this could cause issues.

Is the tax payable? Who pays it? Who calculates what is due?

The vast majority of UK SIPP providers are not experts in overseas tax law, meaning more professional advice will need to be sought, again increasing costs.

4. Costs

We all know that buying a property in a SIPP increases the charges, most SIPP providers will charge a property purchase fee as well as an annual fee and many will make additional charges to cover things like borrowing and leases.

However, the costs rise even further for the purchase of overseas property. The SIPP provider would need to appoint specialist solicitors who have an understanding of not only the laws regarding the country which the purchase is being undertaken but also SIPPs.

Furthermore specialist tax advice might be needed, depending on where the property is located and the whole transaction is likely to take longer, which will also push up fees.

Finally, many overseas property investments pay high commissions to the people who sell them. Any commission payable only serves to reduce the returns payable to investors and should be monitored by investors carefully.

5. Day to day management of the property

Managing a property in the UK on a day to day basis is usually pretty simple, although it can be time consuming and sometimes costly.

Often the property is let to the member’s business and even if the tenant is a third party many SIPP providers allow the member to manage the property themselves. Either way any issues are usually identified quickly and addressed without delay.

This is far harder with an overseas property, it may take longer for issues to come to light and be harder to fix than if the property was in the UK.

Furthermore, if the tenant stops paying rent and the property is in the UK, the SIPP provider will be experienced in the legal remedies which need to be taken. If the same problem arises with a property overseas, the SIPP provider may be inexperienced in dealing with the legal system and authorities of the country in which the property is situated.

Simply put, the distance, different legal system, and even the language barrier, can make it harder to sort out even the simplest of issues.

6. HMRC rules

We’ve seen a number of overseas property investment opportunities that definitely push the HMRC rules as far as they will go, and in our opinion, some cases break them.

HMRC rules, regarding investments in residential property, are pretty clear and in the vast majority of cases residential property is not allowed in a SIPP.

Despite this many overseas property investments come with the spurious label of ‘SIPP approved’, which in practice means very little, other than the fact the people marketing the investment believe it is allowed in a SIPP.

Investors should be very careful though, it is they who will have to pay tax charges, should HMRC deem that the investment breaks the rules, and not the people who have sold the investment in the first place.

7. Due diligence

Many overseas property investment opportunities definitively come under the “too good to be true” heading and completing satisfactory due diligence can be hard.

Due diligence on a UK property investment is relatively straightforward, at a very basic level the property can be visited, and surveys completed easily, as can the necessary legal checks and searches.

However, the same cannot always be said for overseas property. The language barrier must be overcome and a different legal system needs to be understood by both the investor and the SIPP provider.

Finally it might not be as easy to carry our physical due diligence by visiting the property as it would be if the property were located in the UK.

Next steps

If you are considering investing into overseas property via your SIPP we’d suggest you think carefully about the problems we have identified.

We are here to help. Our team of Independent Financial Advisers are experienced in helping clients choose the right investments for their SIPP.

If you have a SIPP or are considering transferring your pension into a SIPP and would like advice on your options call one of our IFAs today on 0115 933 8433, alternatively enquire online or email