Room for investment

2 September 2010

In these times of low interest rates and fluctuating stockmarkets, it is perhaps time to re-examine property as an investment for self-invested personal pensions and small self-administered schemes as indications appear to show it as being a recovering market.

From 2007 to 2009, property prices fell by an unprecedented 45 per cent. The fall in capital values resulted from a loss in demand during the recession as companies found it difficult to meet rental commitments, causing a reduction in rental yields. However, in the 12 months to June 30, commercial property investment returns were up by 15 per cent which, some would argue, may indicate the market has started to recover beyond its low point and matters are improving.

The trend is for such properties to provide a consistent and increasing level of return and there is the potential for long term growth. It is also suggested that such properties have inflation hedging characteristics as rents tend to increase with inflation and their value may rise.

It is the Government’s intention to reduce tax-relieved contributions to an anticipated £40,000 a year from April 6, 2011, so now may be the appropriate time to consider in-specie contributions of property to SSAS and Sipp.

If the client wants to contribute a property by means of in-specie contributions, stamp duty is payable but all other tax reliefs apply in addition to the transfer being treated as though it were a cash contribution which would attract tax relief in the usual way.

Sipps and SSASs can invest in land and commercial property both at home and abroad.

Foreign properties, in particular hotels, are proving popular at present. HM Revenue & Customs classifies hotels as being commercial property and will allow the purchase of an entire hotel or a room within it.

Care must be taken to ensure that the investment does not stray into the realms of residential property. Legal advice should be sought before purchasing any property and care must be taken as some countries do not recognise trusts and the property may be subject to local taxes.

If a property is purchased from the client (the sponsoring employer to the scheme in the case of an SSAS or the member in the case of a Sipp), its purchase price must be supported by an independent valuation and this is the price that must be paid. There are no such requirements for purchases from independent third parties.

In the current difficult, economic climate, the purchase of property from the client can release much needed cash to them, or could assist growth in a company emerging from recession.

The purchase price can be met by using existing funds or by transfers of funds from other schemes. If sufficient cash is still not available for the purchase, it is possible to borrow up to 50 per cent of the SSAS’s or Sipp’s net assets to provide additional funds.

Where a property is purchased from the client it is often let back to them and the rent, which must also be independently valued, is paid to the SSAS or Sipp. This payment attracts generous tax relief and builds up tax-free within the fund.

If it has been necessary to borrow, the debt can be repaid from the rental income that is received. When the property is sold, any profit made is not subject to capital gains tax. Also, in the unfortunate event of the business failing, the property, while held within the Sipp or SSAS, is protected from creditors.

IFAs who have clients who are interested in property investment can rest assured that member-directed pension schemes such as bespoke Sipps and SSASs can take advantage of these opportunities but should use an experienced and specialist administrator who understands the pitfalls.

Phil Clarke is technical services manager at Rowanmoor Pensions

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