Your SSAS pension and what it can do for you right now
If you read last weeks blog you’ll know all about how your small, self-administered pension schemes (SSAS) has a loanback facility that you can use to access much needed cash flow. If you haven’t read it, please do.
Well, the joys of your SSAS don’t stop there. It can also be used to purchase property. However, please read on carefully, as there are many do’s and don’ts associated with SSAS schemes and property purchase. Getting it wrong could end up costing you a great deal in tax.
Who can and can’t be involved in the purchase
If you wish to, your pension scheme can purchase property with other parties such as your company, yourself or another pension scheme. It can even purchase property with an unconnected party.
However, HMRC do require that the pension trustees obtain independent professional advice to confirm the market values regarding the purchase price or rental, if there is any connection with the pension scheme with the vendor of the property. This must be undertaken in order to comply with HMRC’s ‘arms-length’ requirements regarding the transaction.
Where there is no connection with the other party, HMRC does not require any independent valuation.
For cases of joint ownership
If your SSAS has purchased the property with a third party, then a Declaration of Trust (DOT) will be required, in order to legally recognise the proportion of ownership held by each party. As this involves your pension scheme, the DOT needs to include pre-emption rights. Where the pension scheme may have to liquidate its investment in order to pay death benefits, it’s usual to offer the co-owner(s) first refusal to buy its share.
Your business, yourself and another party can purchase property jointly. As long as any joint ownership is registered with the Land Registry, any property purchased can also be let back to your own business or an unconnected party. It is however important that the SSAS pension scheme only receives its proportion of the sale proceeds or rental income and it must also ensure that it pays its percentage of all ongoing expenses.
Buying, selling and letting
If you are considering using your SSAS to purchase a vacant property, then you will be required to ensure that there are sufficient funds available to cover repairs, rates, maintenance and all legal and other costs, as there is no rental income immediately available. This is usually achieved by retaining the relevant sum, which is held back in the pension fund.
You SHOULD NOT purchase residential property with your SSAS. As residential, and some other types of property, are subject to very significant and costly tax charges if held by a pension scheme. To avoid these onerous tax implications, you really should only consider the purchase of commercial property such as retail, office and industrial buildings.
Flipping from commercial to residential can be done
As your pension scheme can’t hold residential property without facing extremely high tax charges, if you are looking to purchase a commercial property and flip it to residential, then you need to be aware of what point HMRC deems it to have converted to residential.
From speaking with architects, it’s our current understanding that the certificate of habitation and the point at which a commercial unit becomes a residential one (as referred to by HMRC), is at the point when the Completion Certificate is issue by the architect. As such, it’s imperative that the property is taken out of the pension scheme PRIOR to the Completion certificate being issued by the architect.
Property types you should and shouldn’t consider
This is a brief list of The Good, The Bad and The Ugly when it comes to property types you can consider for purchase with your SSAS:
- Shops Industrial property Offices
- Care Homes
- Pubs and Restaurants
- Farmland Development Land
- Car Parking
The Bad (property types not allowed)
- Residential Property
- Holiday lets
- Timeshares & beach huts
- Freehold including long leasehold residential (even if only ground rents)
- Caravans and other moveable property
- Log cabins
- Leasehold property with less than 50 years (deemed a “wasting asset”)
The Ugly (to be avoided despite being commercial)
- Any un-lettable property that will be sold again in the short term
- Specialist properties that are difficult to sell
- Properties with environmental or contamination issues
- Any property adjacent to your house or garden
Please note that this is a guide only and you should properly research if the property you are thinking of purchasing complies with HMRC rules.
Where can you raise the finance for the purchase?
Your SSAS is allowed to borrow from any source available; just so long as the loan terms are commercial. Obviously if the source is a bank or building society, then the terms will automatically be commercial. Where the lender is a source that does not have a consumer credit licence, or is connected to you, then you may have to provide accompanying evidence that the terms are commercial.
Repayment of borrowing
Although you may be able to prove rental income, you should also consider affordability.
Which is why, at the initial stages of purchase, a Member Trustees should be tasked with considering this aspect. It is also important that you do not rely upon future pension contributions to meet borrowing requirements, as the future payment of contributions is not mandatory.
If you are using your SSAS to fund a purchase for the first time, then your first loan can be up to 50% of the net value of the pension scheme.
Pension Scheme value: £100,000
Maximum borrowing: £50,000
Amount available to purchase property: £150,000
Get the right advice from day one
Get professional advice on the rules of property purchase, development, leasing, resale or any other aspect of property ownership from a qualified and expert financial adviser who knows this area well. The wrong advice, or no advice at all, could leave you with a whopping great tax bill and a badly damaged pension pot.
As always, we at Bridgewater Financial Services are here to provide expert and independent advice on any questions you have regarding using your pension to acquire property, or any other financial enquiries you may have.