Adviser > Technical Central > Pre simplification > Occupational > Small Self-Administered Scheme - Property Purchase
Small Self-Administered Scheme - Property Purchase
The content of this page is based on our understanding of how pensions worked before A-Day, the 6 April 2006, and is provided for reference only.
One of the major advantages of a Small Self-Administered Scheme (SSAS) is the ability to invest in commercial property. Many Trustees use their SSAS to buy and lease back a property from the employer.
There are many advantages in a SSAS owning a property, including:
- no Capital Gains Tax liability when the property is sold
- if the property is occupied by the company, the rent payable is an expense for relief from Corporation Tax
- if the employer goes into liquidation, creditors would not have access to the property
- no Inheritance Tax liability as the property is an asset of the SSAS
- the rent paid by the tenant is tax deductible as a business expense, and
- the rent received by the SSAS helps to increase the retirement benefits.
It is important to note that a SSAS can only own commercial property e.g. shops or offices.
Company property
A property can be purchased from the principal employer or any employer that participates in the scheme, including any associated employers.
If the SSAS Trustees are considering a property purchase they must take into account the scheme's liquidity requirements i.e. the need to have cash funds available in the scheme to purchase benefits when required.
Although, under Her Majesty's Revenue and Customs (HMRC) practice, annuities need not be purchased until a member reaches age 75, the scheme must have sufficient readily realisable assets (apart from the property) to enable an annuity to be purchased from age 70 onwards. This effectively means that the property would have to be sold before the oldest member reaches age 70, unless there were sufficient liquid funds from contributions paid into the scheme in respect of other members to cover the purchase of that member’s pension entitlement without selling the property. The property may need to be sold even before then if the member wished to purchase an annuity before age 70. It should also be borne in mind that early retirement, withdrawal from service or early death could necessitate the release of funds and, therefore, the realisation of assets.
An independent valuation of the property is required if it is being purchased from the company, and the company must pay a commercial rent based on an independent rental valuation to the SSAS for its occupancy. In addition to the property and rental valuations, HMRC will require to see a copy of the lease between the SSAS and the company.
Property owned by the scheme cannot be used as security for either personal or employer borrowings and must be free of such before being transferred to the scheme. So, for example, it could not be used as collateral for any future company borrowing which might be required to assist in the future expansion of the business.
Other types of property
Residential property
A SSAS may not invest in residential property except where:
- it is occupied by an employee as a condition of service (e.g. a caretaker) and that employee and his relatives are not (and have not been during the preceding ten years) Controlling Directors of the company, or
- a person who is not a scheme member nor is connected with a scheme member but who occupies the property in connection with their occupation of business premises (e.g. a shop with an integral flat above) owned by the scheme.
Hotels, guest-houses and nursing homes
Hotels, guesthouses or nursing homes consist of accommodation that may be both residential and commercial at the same time. Where the residential parts are being occupied by paying customers HMRC will normally treat them as commercial and allow them to be an asset of the scheme. It should be noted, however, that it would not be permissible for scheme members or anyone connected with them to live in the hotel or nursing home.
Residential property with planned conversion to commercial use
HMRC do not allow investment in property that is residential at the time that it is purchased. The intention to convert, or even the existence of planning permission for conversion to commercial use, does not alter the position.
Holiday property
HMRC do not allow investment in holiday property e.g. country cottage.
Riding stables, golf courses, forestry, woodlands and agricultural land
Investments in riding stables, golf courses, forestry, woodlands and agricultural land are usually acceptable. Care has to be taken that any residential element is agreed by HMRC (see section above on residential property). There must be no potential for members of the scheme or their relatives, including spouses and their relatives, to enjoy the benefits of the land. Forestry, woodlands and agricultural land may have attached amenity rights such as shooting or fishing. These amenities must not be made available to members of the scheme, scheme Trustees or any of their relatives even if they pay a commercial rate for them.
Non-income producing land
There is generally no objection to a SSAS investing in land for development and it is acceptable for the SSAS to undertake any such development. Any residential property built on the land cannot be held by the SSAS, unless it falls into one of the exemptions shown above.
Overseas property
Investment in property overseas is subject to the same rules as property in the UK e.g. offices are acceptable, but a villa is not. It is important that the scheme Trustees speak to their solicitors to check that there are no aspects of property law in the country in which the property is being purchased that would jeopardise the approval of the scheme. The scheme Trustees should also check that they would not encounter any problems when they come to sell the property.
Other considerations
Residential property
A SSAS may not invest in residential property except where:
- it is occupied by an employee as a condition of service (e.g. a caretaker) and that employee and his relatives are not (and have not been during the preceding ten years) Controlling Directors of the company, or
- a person who is not a scheme member nor is connected with a scheme member but who occupies the property in connection with their occupation of business premises (e.g. a shop with an integral flat above) owned by the scheme.
Hotels, guest-houses and nursing homes
Hotels, guesthouses or nursing homes consist of accommodation that may be both residential and commercial at the same time. Where the residential parts are being occupied by paying customers HMRC will normally treat them as commercial and allow them to be an asset of the scheme. It should be noted, however, that it would not be permissible for scheme members or anyone connected with them to live in the hotel or nursing home.
Residential property with planned conversion to commercial use
HMRC do not allow investment in property that is residential at the time that it is purchased. The intention to convert, or even the existence of planning permission for conversion to commercial use, does not alter the position.
Holiday property
HMRC do not allow investment in holiday property e.g. country cottage.
Riding stables, golf courses, forestry, woodlands and agricultural land
Investments in riding stables, golf courses, forestry, woodlands and agricultural land are usually acceptable. Care has to be taken that any residential element is agreed by HMRC (see section above on residential property). There must be no potential for members of the scheme or their relatives, including spouses and their relatives, to enjoy the benefits of the land. Forestry, woodlands and agricultural land may have attached amenity rights such as shooting or fishing. These amenities must not be made available to members of the scheme, scheme Trustees or any of their relatives even if they pay a commercial rate for them.
Non-income producing land
There is generally no objection to a SSAS investing in land for development and it is acceptable for the SSAS to undertake any such development. Any residential property built on the land cannot be held by the SSAS, unless it falls into one of the exemptions shown above.
Overseas property
Investment in property overseas is subject to the same rules as property in the UK e.g. offices are acceptable, but a villa is not. It is important that the scheme Trustees speak to their solicitors to check that there are no aspects of property law in the country in which the property is being purchased that would jeopardise the approval of the scheme. The scheme Trustees should also check that they would not encounter any problems when they come to sell the property.
| Joint purchases | HMRC allows a joint purchase to be made with another party as long as that party is not a scheme member or a connected party e.g. a SSAS could jointly own the company property with the company or could hold a joint investment with self-invested personal pension arrangements. |
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| VAT | Where property or rental transactions are subject to VAT the scheme Trustees should discuss the implications of registering the scheme for VAT with their Accountants. If VAT is payable, this will obviously have financial implications. |
| Pensioneer Trustee | On the 29 August 2002 HMRC issued PSO Update 69 ‘Enhancing the Role of the Pensioneer Trustee’. Following the Update it became a regulatory requirement for the Pensioneer Trustee to be a registered owner along with other Trustees of all scheme assets, including properties. The rules for this registration depend primarily on where the property is situated. The overriding rule is that the name of the Pensioneer Trustee should appear on the document evidencing any interest in land/property owned by the Trustees of the SSAS together with the names of the other Trustees. The Pensioneer Trustee must be named on the Title Deed along with the names of the other Trustees. |
| Trustees borrowings | The Trustees of the SSAS can borrow money to assist in the purchase of a property. The maximum amount that HMRC will allow the scheme Trustees to borrow is a sum equal to the total of:
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| Reporting requirements | Within 90 days of the property purchase, HMRC must be advised of full details including any Trustees' borrowings. Failure to meet this requirement can incur financial penalties and jeopardise the scheme's approval. If the property has been purchased from a connected or associated party, then HMRC will also need to see a copy of the independent valuation report. In addition to this, if the property is being leased to a connected or associated party then they will also need to see a copy of an independent rental valuation and a copy of the lease. |
| Property valuations | Property valuations will be required every three years when the triennial Actuarial Reports are prepared. |
After A-Day
After A-Day (6 April 2006) new rules will allow pension schemes to invest in residential property. The new rules will allow people to use their pensions to buy their own home, a holiday home or a buy-to-let home. Further details can be found using the following link:
The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice.
All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.
Updated 6 July 2004
For professional advisers only
