Martin Tilley: The high cost of Sipp commercial property transfers

Martin Tilley

Collection of data for the purpose of management information is key to a well-run business, and looking for trends can help allocate resources to meet demand. Monitoring not only numbers of new cases but investments being made, sources of business and so on, can help identify these trends.

One that has become increasingly strong lately is the proportion of new cases coming to us that have listed direct commercial property as their first/primary investment. Data collected for the first two months of this year shows, of all new Sipps established with us, 54 per cent were for this purpose. This follows three consecutive calendar years where the percentage varied between 45 per cent and 48 per cent.

Although in the majority, not all these cases were acquiring a new property. An increasing number are cases transferred from other Sipp providers where existing property is held.

Some intermediaries have cited reasons such as service and fees as contributory factors to this, while others have quoted a change in terms or proposition. This is perhaps not to be unexpected following on from the FCA’s thematic review of Sipp providers and the revision to Sipp operators’ capital adequacy requirements, which, now finalised, becomes effective from September. Past and continuing consolidation in the Sipp market might also reflect on propositions.

However, feedback from some advisers is that the process to transfer across a directly owned commercial property case can be complicated and expensive.

Unlike a SSAS, where on change of professional trustee the property remains in the same trust and is simply re-registered, with a Sipp the property (and other assets) must be lifted from one provider and transferred to the Sipp of another. This is because each Sipp is integral to, and entwined with, the original operator. The good news is that, although the property must be moved from one Sipp to another, provided it remains held for the same underlying beneficiary, no stamp duty land tax should apply.

This does mean, however, the new provider will be accepting the new property into its own Sipp book of assets and, as mentioned, the FCA’s requirements are such that, while a Sipp operator should not be responsible for assessing and commenting on the soundness of the property investment, it should take responsibility for each asset it accepts with regard to it being in the interests of the client to hold it.

For this reason, the new Sipp provider will want to undertake its own due diligence on the property: a process not unlike acquiring the property anew. Just because the property has been accepted by one Sipp operator does not mean it will be accepted as an asset by another.

For example, some providers will not entertain overseas properties, those that have a current tenancy void, rent arrears or a short leasehold remaining, or those that require borrowing or outright ownership rather than a joint ownership basis. Different approaches are also taken by some with regard to property development.

The new Sipp provider may also require the usual property searches to be undertaken, particularly if those previously done were several years ago. Checks on environmental issues and the existence of asbestos management plans will also be necessary. Another check becoming more important is that for an Energy Performance Certificate, as properties falling into the lower efficiency bands may, from 2018, become difficult or impossible to market unless improvements are made.

These barriers are not to say the transfer of a property from one Sipp to another is not a worthwhile consideration. Some providers are simply more geared to commercial property acquisition and administration than others, so features such as service and administration may simply fit better with individual clients. The packaged offerings where all administrative functions are carried out and under the control of the Sipp operator may suit those who are busy running their business and do not have time to do it themselves. For these clients a fee premium might be payable.

For others, the ability to select their own solicitors, valuers and property managers, or indeed self-manage their properties, will mean the resources of the Sipp operator will be less used and thus the fees payable might also be less. An often-overlooked feature is the ability to arrange the property’s insurance, savings on which from the operator’s blanket policy can sometimes make the costs associated to transfer insignificant.

 Martin Tilley is director of technical services at Dentons Pension Management