A comprehensive guide to Pensions and Investments for Investing in Property
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The Landlord’s Pension have been dealing with property investors and in particular those who are now purchasing properties via their limited companies for over 14 years. As company directors these individuals are eligible to establish a Small Self-Administered Scheme (SSAS) pension which enables them to utilise funds from existing and “frozen” pension schemes at any age to invest in and grow their property businesses.
SSAS pensions are subject to the pension rules and regulations of HMRC SSAS rules. With this in mind it is vitally important that the members of these schemes have the knowledge and guidance on the rules, what is and isn’t permissible and the potential consequences of a breach of the rules. The headline figure for any pension transaction that breaches HMRC rules is a fine of 55% of that transaction, combined with the fact that the company or individual involved would then potentially come under increased scrutiny from HMRC this is not a position that anyone wants to find themselves in.
As a SSAS broker The Landlord’s Pension took the decision at outset to only work with SSAS administrators who act as professional corporate trustees. This gives our clients the peace of mind that while they have the autonomy over their funds giving them the control and flexibility they desire that they have a team of experts in the administrators ensuring that these decisions do not fall foul of HMRC SSAS rules and regulations, combined with the ongoing help and support from The Landlord’s Pension on the best way to increase the fund value and ultimately provide the funds our clients require in retirement.
Most property investors concentrate on residential property, whether it be single lets, HMO’s, serviced accommodation or holiday lets. It is important to note that under HMRC rules the direct purchase of residential property by a pension fund is prohibited. Many investors are under the illusion that if the asset is bought through a limited company or run as a commercial enterprise that this is sufficient to class the asset as a commercial entity. Unfortunately, when it comes to pension purchases HMRC do not share this view. Regardless of how the property was purchased or how it is run the view of HMRC is a property is classed as a residential asset if:
- The building or structure is used or suitable for use as a dwelling
- Any related land that is wholly or partly the garden for the building or structure
- Any related land that is wholly or partly grounds for the residential property and which is used or intended for use for a purpose connected with the enjoyment of the building
- Any building or structure on any such related land
- Any building specified in Regulations as residential property
The most important, and some would say ambiguous statement, is that of the asset being “suitable for use as a dwelling” In SSAS pension terms an HMO, serviced accommodation and holiday lets fall into this category as the building(s) could realistically be converted into a family home or homes, which in most cases was the original use of the property or properties involved.
With regard to permissible property an example of HMRC’s definition of these are:
- A home or other institution providing residential accommodation for children as a dedicated children’s home
- A hall of residence for students. This does not include normal houses or flats let to, for example, university students
- A home or other institution providing residential accommodation with personal care for persons in need of personal care by reason of old age, disability, dependence on alcohol or drugs mental disorder
In the event that the asset to be purchased is vacant or derelict then HMRC’s guidance is that you need to look back at the last time it was used. If it was last used for one of the non-residential purposes set out above then it is not treated as residential property. If the building has never been used and is more suitable for one of the uses specified above than for any other purpose it is not treated as residential property regardless of their suitability for use as a dwelling.
This brings us on to the purchase of property with the intention of change of use and commercial to residential conversions which can be a bit of a minefield and is an area which should only be entered into when fully informed and prepared.
When purchasing a property which is deemed as commercial through a SSAS pension scheme, the full available funds can be utilised and in addition up to 50% of the fund value can be raised with an external lender for this purpose. It is imperative that this asset is never deemed as residential whilst owned within the pension fund. As such, the timing and disposal of an asset is key and whilst the SSAS pension funds are an invaluable tool for the initial purchase of the property, a robust exit strategy is essential when considering this type of venture as is mentioned in the HMRC rules:
“A property that is sold before the development or conversion is substantially completed never becomes residential property”
The rules for this kind of development are explained in the HMRC guidance below:
Whilst it is in the course of construction, conversion or adaptation such land and property is not residential property because during that period it is not suitable for use as a dwelling.
Land and buildings being converted are treated as residential property from the point when they become suitable for use as a dwelling.
In any specific case this point should be determined by taking a common sense approach to the facts and circumstances. Essentially the question to be answered is: would a person normally live in that dwelling?
The point at which this occurs will normally be when the works are substantially completed. In the case of UK property this is likely to be when the certificate of habitation is issued.
In summary, the ability for company directors to take control of their pension funds through a SSAS pension and invest in their property businesses is an option which more and more people are taking advantage of. That said, it is important to ensure that you deal with experienced professionals such as The Landlord’s Pension during this process, from the initial establishment of the pension scheme through to HMRC registration, transfer and purchase and investment decisions.
Need specific pension investment advice?
Read our SSAS Pension guides:
- SSAS vs SIPP pensions
- What is a Self-Administered Pension?
- How To Set Up A SSAS pension
- What kind of regulations and protections are there for SSAS?
- What Can an SSAS Pension Invest In?
- What are SSAS death benefits
- HMRC Rules
- SSAS Pensions
- How to find the best SSAS provider
- Can a SSAS buy residential property
- A guide to SSAS Pension scheme Loans
Still unsure about something? Please don’t hesitate to contact us about enquiries relating to pensions and investments in property.
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The Landlord’s Pension is an expert in this niche sector of financial planning and have been helping clients to invest in property since 2004