Can I use my pension to invest in property?

Many people worry about the risks linked with financial markets. As such, a common question people ask us. "Can I use my pension to invest in property?"

All registered pension schemes can invest in property or land. This can be either in the UK or overseas. However, the way you can use your pension to invest in property depends on the type of pension you have.

Some pension schemes can invest in property directly. To invest directly, you will usually use a SIPP or a SSAS.  Otherwise, pensions schemes can invest indirectly through pooled vehicles. These include unit trusts or a real estate investment trust.

The process can be quite complex. Therefore, this article will cover some basics. Furthermore, we recommend that you seek financial advice before making any decision.

Property investment through a pension scheme

The property you invest your pension in can be residential or commercial. However, there are various controls regarding pension schemes and property investment. These controls can restrict some scheme options and focus on areas such as.

• SIPP and SSAS investments in residential property.
• Property transactions with connected parties.
• Investments in employer-related property through an occupational pension scheme.
  
  

Product providers and pension scheme trustees may limit the investment options available. This is especially true for overseas investments as specialist knowledge may be a requirement. Also, other regulatory requirements may apply.

Using a pension scheme to invest in commercial property

Assuming a business owner is looking to purchase a commercial property. The property is for use by their business. As such, they have several options.

• Purchase through the company.
• Purchase as an individual or individuals.
• Purchase through a pension scheme, normally a SIPP or SSAS.
  
  

One or more of the above may be the most suitable for you. Also, the answer may be evident in many cases. However, careful thought is necessary if the answer is not directly apparent.

There are advantages and downsides of purchasing a commercial property using a pension scheme. This includes purchasing jointly through multiple pension schemes.

Advantages

A potential initial cost saving. Any additions made to the scheme to help finance the purchase usually attract tax relief.

• Rental income received by the scheme is exempt from income tax.
• If the company pay rent, it is an allowable expense.
• The pension scheme owns the property and is separate from the company or person. As such, creditors cannot force a sale of the property if the company or person goes bankrupt.
• When selling the property, no capital gains tax is payable.
• Company cash flow improves. Instead of using funds to purchase the property they can finance other business purposes. Furthermore, if the company already owned the property, there would be a cash injection from the purchase.
• Typically, there is no inheritance tax on the death of the member. This is because the property is an asset of the scheme. However, there are exceptions to this.
• Property can remain indefinitely within a pension scheme. This applies if there is enough liquidity to cover any income requirements.
• The pension scheme is responsible for the property maintenance.
• Joint property purchase is possible. Two or more SIPP can jointly own property. The percentage each SIPP owns depends on the contribution made to the purchase. Each SIPP can then receive income equal to its share of the property.
  
  

Disadvantages

• The company must pay rent at the market rate.
• Lack of diversification.
• The company cannot use the property for security when borrowing. The pension scheme owns the property.
• Restrictions may apply to the pension scheme regarding borrowing. Fifty percent of the net assets within the scheme is the maximum the scheme can borrow.
• If the company goes into liquidation, and a new tenant is not available, investment returns will fall.
  
  

Other costs

If you invest your pension in a property, additional costs may apply. Some of these costs are below.

• Arrangement fees for the mortgage.
• Charges by the pension scheme provider.
• Charges for property management.
• Surveyors' fees.
• Searches.
• Solicitor's fees.
• Potential stamp duty.
• VAT if the property is less than three years old. (or has been opted into tax by the seller)
  
  

The pension scheme should pay these costs. As such, you can avoid additional tax charges. Therefore, funds in addition to the purchase price must be available. These funds must be within the pension scheme.

Tax

Any company or person selling a property to a pension scheme will pay tax on any gain. Furthermore, the pension scheme must pay stamp duty.

However, if a pension scheme owns a property, it operates in a highly tax-efficient environment. The two key tax advantages are.

• Property rental income is free from income tax.
• Any capital gains on the property are free from capital gains tax.
  
  

When a company rents a property from a pension scheme, the rent is a business expense. As such, it is usually deductible from the profits before tax assessment.

Age considerations

Regardless of the age profile of scheme members, a pension scheme can invest in property. However, consideration and planning should be given to any potential death benefits or retirement benefits that may become payable. These benefits are payable when due and not usually delayed.  Remember that property is not a liquid asset. Furthermore, it is not always easy to sell quickly if money is due. Therefore, assessing property investment through a pension scheme requires care.

Connected party transactions

Pension schemes can lease, rent, or buy most types of assets to or from scheme members or other connected parties.

HMRC, however, do have certain expectations. As such, any transaction between a pension scheme and a connected party must take place on standard commercial terms. Also, at normal market rates. If this does not apply, the difference between market rates and the amount paid will be subject to tax. This is because it is seen as an unauthorised payment.

Pension scheme joint ownership

• A pension scheme can own a property with another party. This can include.
• An individual.
• A company.
• Another pension schemes.
  
  

However, this can create extra problems and costs.

A conflict of interest may arise if the joint owners have different views on certain matters. For example, if one party wanted to sell the property and the other did not. As such, many providers only allow a joint purchase between the same provider and scheme type.

When a joint purchase occurs, each party owns a related percentage of the property. The rate is equal to the level of contribution. Furthermore, you divide any income or expenses relating to the property. The split is according to the percentage held by each party.

Investments in employer–related property

Employer-related investments are.

• Occupational pension scheme property.
• Land investments leased to the sponsoring employer or associated companies.
  
  

Typically, occupational pension schemes have investment limits. These are no more than 5% of their assets in employer-related investments. However, there are some exceptions.

• The scheme has fewer than twelve members.
• All members are trustees of the scheme.
• The pension scheme rules require all members to agree in writing prior to any employer-related investments proceeding.
  
  

As such, this means that the only occupational pension scheme that can meet all these rules is SSAS.

Because they are not occupational pension schemes, the rules do not apply to SIPPs.

Using a pension scheme to invest in residential property

Residential property means any property that is or could be liveable. Furthermore, it includes any gardens or grounds of the property. Additionally, any buildings on the land that relate to the property. This includes garages and other outbuildings. As such, residential property includes.

• Holiday homes.
• Timeshare accommodation.
• Converted commercial properties.
  
  

When a property is not in use, its classification will remain as its last intended use.

Property taxable rules for SIPP and SSAS

SIPP and SSAS are unable to invest directly in residential property. HMRC treats direct investments in residential property as an investment in taxable property. As such, they are subject to heavy tax charges.

However, there are some exceptions.

Residential property held by a pension scheme before 6 April 2006 can continue within the scheme without any tax charges. This applies if certain criteria are met.

A SIPP and SSAS can invest indirectly in residential property through a pooled investment vehicle. These vehicles include.

• Unit trusts.
• An open-ended investment company.
• A real estate investment trust.
  
  

However, the investment must take place through a diverse commercial vehicle that meets HMRC rules.

There are exceptions. Some property commonly regarded as residential is not, as far as tax purposes apply. These include.

• Hotels and rooms unless the member have the right to use them.
• Institutional homes providing care. (children, elderly, disabled, mental health, and drug dependency)
• Students' halls of residence.
• Hospitals and hospices.
• Prisons and other detention centres.
  
  

Furthermore, exceptions also apply to work-related residential properties. This applies if the person living in the property:

• Is required to do so as a condition of their employment.
• Be using it in connection with the use of business premises. Applies if the premises are owned by the investment-regulated pension scheme.
  
  

And

• Must not be a member or connected to a member.
• Must not be connected to the employer if living there as a condition of employment.
  
  

Summary

Using your pension to invest in property can be beneficial. However, it is a complex topic that needs careful judgment. Areas of review are.

• Costs involved.
• Taxation.
• Member age.
• Connected party transactions.
• Joint ownership.
  
  

Other factors also need to be considered. Using a financial advisor will be beneficial. They can guide you through the process, helping you make the best decision. However, finding the most suitable advisor is not always easy. As such, Regulated Advice can help you. We collaborate with financial advisors covering every city in the UK. Furthermore, we always strive to find you an advisor who is close to you. The FCA regulates all the advisors, so let Regulated Advice help you.