Taxable property
HMRC's pension tax manual does not actually limit what pensions can invest in. However, it does impose onerous tax charges on certain types of investments, including residential property. Property types such as retail, offices and industrial units are commonplace for pension acquisition.
Commercial property is a wide-reaching term including properties such as land, dentist and doctor’s surgeries, sports stadia and hotels. Pension providers may also have their own allowability criteria, which may be dependent on risk appetite and controls.
Less typical properties, for example zoos, airports or garages, may require additional due diligence at the point of purchase.
Due diligence requirements may differ between providers, but largely speaking the processes are likely to include the need for a valuation, EPC and perhaps an environmental survey.
It is also pivotal that the property is appropriately insured from completion, and this process is also likely to form part of a provider’s due diligence process.
When looking at commercial property and pensions, it is vital to consider taxable property.
Taxable property is defined by the Finance Act 2004 as "a building that is used or suitable for use as a dwelling", so in essence, residential property. The definition also includes property that is used "in conjunction with a taxable property". An example here would be a garage that is used by occupants of a nearby residential property.
If a Sipp or Ssas is found to be holding taxable property, a scheme sanction charge may apply. A scheme sanction charge could arise when the pension receives income, or is deemed to receive income, from taxable property or when the property is sold from the pension and a chargeable gain is therefore created.
The Finance Act outlines a number of property types, including hospitals and care homes, that would specifically not be deemed as taxable property.
But there are some property types that could fall into a grey area when it comes to taxable property. For example, hotels and bed and breakfasts are both permissible investments for Sipps and Ssas to invest in.
Some providers might take the view that a property that does inherently have a residential element like these property types are permissible on the basis that there are no catering facilities in the individual rooms – in essence, guests can stay in the room but they could not reside there.
There is a concession when it comes to taxable employee accommodation. Properties that are commercial, but have a residential element attached, like pubs and employee accommodation, may fall within this concession.
