It is common for pension schemes to hold commercial property as an asset. The most common types of pension schemes we come across are either a SIPP (self-invested personal pension) or a SSAS (small self-administered scheme). A SIPP is a personal scheme whereas a SSAS is an occupational / employer pension scheme.
Acting for trustees of a pension scheme is no different to acting for a company or an individual. The same level of ‘purchaser due diligence’ is carried out (i.e. searches, title investigation, raising enquiries etc) and the documentation required is the same. Professional trustees of the scheme often however require limitation of liability wording to be drafted into any document when dealing with property. This clause protects professional trustees by limiting their liability to the value of the assets of the pension scheme.
When purchasing commercial property, the land is held in the name of the trustees on trust for the benefit of a pension scheme.
Split Ownership
Quite often pension schemes do not have enough money in the bank to purchase property. A ‘split ownership’ purchase can be a solution to this. For example – if a scheme wanted to buy a property for £500,000.00 but it only had £250,000.00 – it could buy the property jointly with its connected company, with the company contributing the remaining £250,000.00.
In this type of transaction a document is usually entered into between the owners which includes:
- A declaration setting out the beneficial interests of the parties. (In the example given above, it would state that the pension scheme owns 50% and the company, 50%); and
- A right of pre-emption – if one party wanted to sell its share – it should offer its share to the ‘other’ party first.
Borrowing
Some pension schemes (typically SSASs) can borrow money from a mortgage lender in order to purchase commercial property. There are strict rules about schemes borrowing money and these should be adhered to. One rule states that a scheme can only borrow up to 50% of the net value of the pension scheme.
Property Re-registration
It is common for a pension scheme to be administered by a professional trustee company. Sometimes trustees wish to switch their SIPP or SSAS from one profession trustee to another. Once the professional trustee switch has completed, the trustees often wish to transfer property from the initial professional trustee to the new one. This ‘re-registration’ should be carried out by a solicitor and usually, the ‘new’ professional trustee will want the solicitor to undertake a process of due diligence, like the process carried out on a property purchase.
Leases
Once a pension scheme has purchased commercial property, it is common to see the property being leased back to a connected party as the tenant. However, the lease must meet certain criteria for it to be authorised. This includes the lease being made on commercial terms and that the tenant paying the open market rent (which is confirmed by obtaining an independent valuation). If a lease to a third party is proposed – there is no criteria to adhere to – the scheme is free to agree whatever terms with the tenant it wishes. For any queries relating to the tax advantages of dealing with land in your pension scheme, we recommend that you contact your accountant.