Pensions and Commercial Property Guide

It is acceptable for a registered pension fund to invest in commercial property and this facility is often the driver behind the setting up of a SIPP or SSAS arrangement. It is however unacceptable for a pension fund to hold residential property as an asset – and hefty tax penalties will be imposed by HMRC if a registered pension arrangement invests in a property that falls within the residential property definition (as described below):

Residential property can be in the UK or elsewhere and is:

• A building or structure that 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.

• In limited situations a hotel, which includes an inn, or similar accommodation, will be counted as taxable property though this will only be where it provides accommodation rights such as timeshare.

• A beach hut.

• Any building specified in Regulations as residential property.

A building used for any of the following purposes is not residential property:

• A home or other institution providing residential accommodation for children. This means a dedicated children’s home not simply any home that children can live in, for example, a family’s house.

• 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, past or present dependence on alcohol or drugs or past or present mental disorder.

• A hospital or hospice.

• A prison or similar establishment.

• Any building specified in Regulations as not to be treated as residential property.

If a building is not currently in use then 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 its suitability for use as a dwelling.

Financing the purchase

The property can be purchased using the pension fund (which can include personal, employer and third party contributions subject to the usual limits and transfers in from other arrangements) or, as is often the case, by a combination of current pension funds and borrowing. A registered pension scheme may borrow funds from any individual, company or financial institution whether or not they are connected to the scheme, but any borrowing from a connected party which is not made on commercial terms will be subject to a tax charge. A registered pension scheme is authorised to borrow an aggregate amount up to 50% of the net value of the fund immediately before the borrowing has taken place. The value of the asset being purchased using the borrowing must therefore not be taken into account when calculating the value of the fund unless, exceptionally it is already held as an asset of the scheme before the borrowing takes place (e.g. a re-mortgage). Scheme administrators/trustees must take into account any existing borrowing when calculating the limits.

Why invest in property?


• Tax free growth (no capital gains tax) as held by a pension arrangement.

• Tax free income (rental) within the pension plan.

• Enables the pension to support the business (and vice versa) where the commercial property is used by the business – the rental income paid by the business is tax deductible in this case.

• Property may be bought jointly with one or more other parties, including other SIPPs.


• Lack of liquidity within the pension plan if the property is the only or main asset.

• Could cause issues when a member wishes to draw benefits.

• Various fees are payable (and funds must be available to pay them, which usually come out of the pension fund) – Legal fees; Land registry fees; search fees; valuation and surveyor’s fees; insurance; property management; lender’s legal fees (if used); Stamp Duty; VAT: where an ‘option to tax’ is in place on a property, subject to the correct procedures, the pension trustees will usually reclaim the VAT payable on the purchase price of the property and credit this to the SIPP funds. The reclaim can take about three months to complete and there must be sufficient funds in the SIPP to pay the VAT in the first place. Subsequently VAT will be charged on the rent due on the property and on any future sale of the property.

Financial wellbeing matters – maximise your pension by contacting us

01782 461563


Wes Wilkes
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