Dealing with commercial property on death: 3 common scenarios

This article is intended for financial services professionals only. None of the information contained in this article should be received as advice. Pensions are a complicated area of financial planning and IPM suggests that financial advice from a suitably regulated financial adviser is sought before an individual takes any action in respect of their pension savings.

With the countdown on to the proposed introduction of Inheritance Tax (IHT) on pensions from 2027, the conversation around death benefits is one we are increasingly having with advisers. Unfortunately, we do not know any more than most of you at this time!

Although the rules surrounding IHT and pensions are yet to be finalised, advisers are already discussing with their clients the potential implications these rule changes will have. Advisers are looking at assets held in the pension scheme and asking about the potential consequences for a SIPP in the event of an individual’s death.

We feel it’s important not to forget what we already know about what happens to a SIPP in the event of a client’s death.

The SIPP provider will consider all the information to hand when deciding how to designate benefits.
A test against the lump sum death benefit allowance (LSDBA) will be carried out.
From April 2027, the value of the SIPP will need to be reported to the personal representative so this can be included in the probate calculations.
However, where the total value of the estate exceeds the IHT thresholds, the SIPP does not necessarily have to pay 40% of its value. Assets in or out of the SIPP can be used to settle the total IHT due.

It is this last point we want to focus on here. Particularly in our world, as a bespoke SIPP provider, there has been a lot of discussion about how a SIPP holding commercial property will fare post-April 2027, given the property is viewed as an illiquid asset.

It is important for advisers to consider clients’ SIPPs that hold commercial property when it comes to death.

Does including the SIPP put the individual over the IHT threshold?
If so, what is the client’s long-term plan for the property – in other words, is the client in their 40s and likely to sell the property in the next 10 years?
Is it likely their nominated beneficiaries will want to retain the property within a SIPP?
Is there sufficient liquidity both inside and outside the SIPP to meet the client’s IHT liability?

While IHT is an important consideration, we do not feel that the question of what happens in the event of death to a SIPP that holds a commercial property fundamentally changes after April.

While each scenario will vary, here are the three options we see for SIPPs that hold property in the event of a client’s death.

1. Property held by one SIPP – beneficiaries wish to receive benefits

Just because your client wished to hold a property in a SIPP does not mean their nominated beneficiaries will feel the same way. It may be that the beneficiary does not want the complications that can come with holding a property, has a different attitude to risk, or the potential for a cash lump sum is an option they cannot ignore.

We would usually see this option taken where the beneficiary is a non-spouse, or where the deceased’s business is not the tenant of the building.

Once they have decided that they do not wish to retain the property, the property will need to be sold for the SIPP provider to pay the benefits. Managing the beneficiaries’ expectations will be key here, as not only will a suitable buyer need to be found, but the provider must also go through the conveyancing process, which can take months, before concluding their work and making a payment.

The positive to take from this option is that if there is an IHT liability or an LSDBA charge to pay, the SIPP will be fully liquid to meet these requirements.

2. Property held by one SIPP – beneficiaries wish to retain property

Another option is that the property held in the deceased’s SIPP is passed on to one or more nominated beneficiaries. This is most commonly the case when the beneficiary is a spouse of the deceased, or the property is co-owned by other company directors.

In this instance, once the designation of death benefits has been made by the trustee and the beneficiary(s) have confirmed they wish to retain the property, a new SIPP (or SIPPs) is set up into which the ownership of the property is moved.

Death benefits are treated differently for tax purposes than benefits typically accrued by an individual. Therefore, an arrangement within the beneficiary’s SIPP would be created to specifically hold the death benefits, and distribution of these benefits in the future would be taxed in the usual way when paying death benefits from SIPPs.

This also allows the beneficiary to transfer any benefits they have in their own name or pay contributions to the SIPP, as these would be held in a separate arrangement, so both types of benefits are easily identifiable.

Where the property is being retained by more than one beneficiary, such as children, while each beneficiary will still set up their own SIPP, a group SIPP will be created above these which will hold the property. Each individual SIPP will then have a percentage ownership of the group SIPP based on how the death benefits have been distributed.

Thought in this scenario would need to be given should an LSDBA charge arise, or if part of the SIPP is required to meet any IHT liability.

3. Member of a group SIPP – options for remaining members

Where the deceased is a member of a group SIPP arrangement, this can change the dynamics as to what happens with the property, especially if the group is made up of fellow company directors as opposed to family. In our experience, it is unlikely that an individual will nominate their colleagues to receive the benefits from their SIPP!

The death of a group SIPP member makes up one of our ‘Four Ds’ that advisers should consider when looking to advise a group of people on a group property arrangement.

From a trustee perspective, we would treat the death of a member who is part of a group SIPP in the same way as any other.

However, if the nominated beneficiaries elect to take the money to which they are now entitled, or simply they do not want their benefits in a commercial property, this can cause an issue for the remaining group members. If the property is the one from which they currently run their business, it is likely they would not be happy about a change in property ownership.

If this is the case, they will need to find the liquidity to buy out the deceased’s share, allowing the beneficiaries to extract themselves from the group SIPP.

Here are some options they could consider in this scenario:

Use existing money in the SIPP. The remaining group members may have liquid assets in the SIPP alongside their share of the property. Combining these monies could allow them to buy the beneficiary’s share.
Pay contributions into their SIPPs. If they have the means, paying contributions could create sufficient liquidity.
Transfer other pension benefits to their SIPP. Similar to the above, if the remaining group members have pension pots elsewhere, transferring them to their SIPP will help generate liquidity.
Take out borrowing. A SIPP can borrow 50% of its value under HMRC guidelines. The remaining group members could take out a loan so they can buy out the deceased’s share of the property.
Bring another member into the group. There may be another individual in the company who could join the group SIPP, or the remaining members could have spouses with an interest in doing so.

Of course, the nominated beneficiary(s) may elect to retain their share of the property, meaning that the remaining group members do not need to raise liquidity.

Get in touch

To discuss anything you have read about here, or to learn more about our offering, please contact us. Email info@ipm-pensions.co.uk or call 01438 747151.