SIPP property red flags: 6 times a purchase is likely to get messy

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.

Enquiries for SIPP property purchases continue to increase.

Given the varying and sometimes complex nature of these enquiries, not all of them proceed. For example, sometimes the vendor withdraws from the purchase for reasons completely outside of your, the client, or the SIPP provider’s control.

Regular readers of our newsletter will be aware that commercial property purchase is an area of strength for IPM. We own over 1,300 properties on behalf of our clients and employ a dedicated property team, a member of which is allocated to each transaction. This gives advisers and their clients a point of contact from instruction through to completion and beyond.

If you’re interested in how we help advisers work on property purchases within SIPPs, check out:

Often, we are asked to consider a transaction before advice is given by an adviser. This is a sensible thing to do. Given our experience, there are often things that IPM may spot in a proposal that cause us concern or impact the advice that is being delivered.

It is worth noting that while IPM can agree to transactions in principle, we can never give any guarantees that we can proceed with a purchase until such time as the SIPP is established and solicitors instructed.

With that said, there are areas that we know could become a problem in advance of having the SIPP set up. Here are six potential property purchase red flags we could spot.

1. There’s a residential element

Rule number one of purchasing property in a SIPP is that owning residential property is not permitted within HMRC guidelines. Where a SIPP owns residential property, tax charges can apply.

HMRC’s definition of residential property in the pensions tax manual is “somewhere suitable for a dwelling”. This is vague, and SIPP operators will take different views as to what they will or will not accept. As a rule, IPM will not own any of the following within our scheme:

Student accommodation
HMOs
Short-term holiday lets / Airbnb-style properties

Despite this stance, just because a transaction may have a residential element, it does not mean that the SIPP cannot help. In fact, we deal with residential queries more often than people may think.

Take shops. If you walk down many high streets in the UK, often there will be a flat above the commercial element on the ground floor. It’s true that a SIPP is unlikely to purchase the full property. However, it is possible to split the title so that the SIPP only owns the commercial element on a leasehold title.

Then there are those properties which have a residential element that you potentially could own through a SIPP, like a pub with the manager’s flat above or a care home. These types of purchases are worth a chat with your chosen SIPP provider before proceeding further.

2. Funding is tight

Fundamental to any property transaction, in or outside of a SIPP, is the funding. When it comes to a SIPP, there is often a finite amount of money that can be used to fund the transaction.

Sometimes, proposed purchases are put to us and something about the agreed price and the amount of money available does not make sense. It could be that the property is VAT elected so the additional 20% has not been accounted for, or the costs have not been taken into consideration (the SIPP must pay for all costs relating to the purchase, including SDLT and solicitors’ costs).

Examples of how we have assisted advisers in scenarios where funding is tight include:

Where a property is VAT-registered, we can assist an adviser in what the process looks like, the amount that the SIPP needs to have in it to fund the purchase, and how to manage client expectations – although IPM is not a VAT specialist.
Explaining how borrowing in a SIPP works, including connected lending (i.e., where someone connected to the SIPP beneficiary provides a loan to the SIPP as opposed to a traditional lender).
Demonstrating how transactions can be spread over tax years so that multiple annual allowances can be utilised ahead of completion.
Exploring other options as to how the SIPP can have greater liquidity; for example, is there anyone else who can set up a SIPP to transfer benefits and join a group SIPP arrangement (like a spouse or business partner).

3. Hazardous commercial properties

The definition of commercial property is so vast, we have been asked to look at so many different types of properties over the years. Most are what we would call more routine enquiries: shops, light industrial units, and offices, as an example.

However, there are some other types of properties that make us pause, not necessarily because we cannot accommodate them, but because experience shows there are additional considerations.

These are properties where searches could come back with potential issues, which can include:

Petrol stations either currently in use or where the site has previously been used for this purpose, mechanics’ garages, or factories that hold more hazardous chemicals
Properties where there may have been some contamination in the past or, in the case of petrol stations, tanks are underground.

It is rare that anything in the searches prevents a purchase from proceeding. But it may mean that additional environmental searches are required. These can take time and cost money. IPM can help advisers navigate this and manage client expectations.

4. The purchase must be a good investment for the SIPP

We are used to purchasing properties for clients whose businesses will occupy them upon completion, paying market value rent to the pension scheme.

We can understand why this makes sense – often a pension is an unused resource for purchasing business premises. The rent paid to the SIPP can be Corporation Tax-deductible for the business while not attracting Income Tax in the SIPP, and there is no Capital Gains Tax payable on disposal of the property.

However, what might make sense for the client and their business has also got to make sense for the SIPP. As a trustee, IPM will view the purchase as an investment of pension scheme monies.

Therefore, the whole purchase needs to make sense:

The client may think that the property is perfect for their business and be happy to pay a premium for it. However, what the client may feel is best for their business may not be best for the SIPP. For purchases above market value, IPM would want to understand the rationale behind this and why this is in the best interests of the pension fund.
Sometimes we are asked to look at properties which may not be attractive to anyone other than the prospective purchaser. This is mainly due to location; if the SIPP was required to put the property up for sale, would there be demand in the market for it and has the SIPP got a realistic chance of achieving a market value sale?
Is the market value rent, which must be paid by a connected tenant, going to generate a reasonable return for the SIPP?

5. Short-term purchases

In our view, property purchases in SIPPs should be seen as medium- to long-term investments. The purchase costs can be high, so it will take some time to recoup these through rental income and asset appreciation. Most of our enquiries fall into this bracket.

We would always prefer SIPP purchases to come with a tenant in place, but we appreciate this is not always the case. In this instance, we want to know what the plan is going to be to get the property generating a return for the SIPP as soon as possible.

Sometimes, people approach us to purchase an unoccupied property with a very loose plan as to how a tenant is going to be put in place. Further, it sometimes transpires that the aim is for the property to be sold in the next few years, regardless of whether it is occupied or not.

Queries of this nature always cause us concern. This is not only for the reasons outlined above, but also surrounding HMRC trading rules for pension schemes. If the pension scheme is being used as a device to shelter a capital gain, for example, HMRC could well investigate further.

We will help advisers walk through such scenarios, pointing out the areas of concern and ultimately explaining why IPM would not be comfortable in proceeding.

6. Land purchases

While land purchases are permitted under HMRC guidelines in the Pensions Tax Manual and we own lots of land within our scheme, we always approach these types of enquiries with more caution than we would do with traditional property purchases.

There are extra areas we would consider in this instance:

Access to a public highway – This comes back to the marketability of the land, which we considered above for properties. If there is not clear access to the land, it would make selling this land on the open market and achieving market value very difficult.
Use of the land – Any property or land purchase in the SIPP must be on a genuine commercial basis. While this can be easy to demonstrate for traditional properties, this is not always the case with land. A lease will need to be granted for use of the land, and IPM would want to understand what the land will be used for before proceeding.
Rental income – On our experience, rental income on land tends to generate a lower percentage yield than traditional property. While this in itself may not cause an issue, it is important that the SIPP is still receiving a healthy return on investment. We have been presented with land purchases whose annual yield would not cover our annual administration fee.
Proximity of land to residential property – The HMRC residential restrictions do not just apply to buildings; they apply to land too. We are going to look less favourably on enquiries which adjoin residential premises, particularly those belonging to the SIPP beneficiary.

Speak to us

If you have questions about property purchases within a SIPP or are interested in working with our experienced team, email info@ipm-pensions.co.uk or call 01438 747151 to learn more.