It is becoming increasingly popular for pension schemes to buy commercial properties as an investment. Purchasing a commercial property through an individual or company pension scheme can be tax efficient, it offers asset diversification (allowing schemes to spread their risk over a number of different investments) and it can offer a good return on investment.
Stamp Duty Land Tax (“SDLT”) must however always be considered for a pension scheme property purchase well in advance to avoid a nasty surprise. It is quite often the case that two amounts of SDLT will be payable for a purchase of a commercial property by a pension scheme as described below. Pension schemes and their connected parties should therefore consider this double tax bill in their budgets.
What is SDLT?
SDLT is a tax on land transactions. It can be payable in respect of transactions involving the transfer of interests in land, including the grants or assignments of leases.
SDLT payable on the purchase price
Depending on the purchase price, SDLT may be payable on the purchase of a commercial property. SDLT must be paid for by the buyer and is payable on the total purchase price including any VAT. Therefore if a property was purchased for £260,000 plus VAT, the SDLT payable would be £9,360 i.e. 3% of £312,000 (£260,000 plus VAT).
What are the current SDLT thresholds on commercial property purchases?
| Freehold Purchase Price | SDLT rate |
|---|---|
| £150,001 to £250,000 | 1% |
| £250,001 to £500,000 | 3% |
| Over £500,000 | 4% |
SDLT payable on the lease to the tenant
As pension schemes are non-trading entities it is necessary for a lease to be put in place to the occupier of the commercial property. The occupier may be a third party who is unrelated to the pension scheme or an individual or company which is associated with the pension scheme. The presence of a lease will ensure a steady stream of income into the pension scheme.
The lease to the tenant should be treated the same as any other lease and the SDLT rules applying to leases still apply to pension scheme leases – even where the pension scheme and the tenant are connected.
On a lease, it is the tenant’s responsibility to calculate and pay any tax due and in respect of any notifiable transactions they need to submit a Land Transaction Return to HMRC within 30 days of the effective date of transaction.
The calculation of SDLT on the grant of a new commercial lease depends on the length of the lease, the premium paid (if any) and the rent payable under the lease. HMRC do have a useful SDLT calculator on their website to calculate the potential liability. Again the SDLT will be calculated on the annual rent plus any VAT payable on that rent.
To discuss any aspect of pension scheme property transactions, please give us a call on 0116 289 7000.