Property principles

Commercial property investments for Sipps are commonplace today and last month even British tennis star and health club mogul David Lloyd launched his own Sippable investment property fund.

But while investment in commercial property is perf-ectly legal and many investors continue to make healthy yields from investment properties, a lot of questions continue to hang over choosing property as a part of your pension fund.

In particular, the line between what is commercial property and an investment in overseas holiday homes can raise questions about what is and what is not allowed in a Sipp or a SSAS.

Many hoped that the recent court case against Sipp provider Freedom Sipp would clarify HMRC’s stance on overseas property once and for all but when Freedom Sipp was forced to wind up over an unpaid tax bill, the legality or otherwise of sale and leaseback property was left unresolved.

Rowanmoor technical director Robert Graves says the issue is straightforward. To avoid hefty tax charges, any property in a Sipp investment must not be considered a dwelling.

Graves says: “The rule hinges on whether the property is taxable and that depends on whether the property can be construed as a residen-tial dwelling. Obviously, a holiday home can be construed as such but we are seeing an inc-rease in investments in hotels and hotel complexes.

But investors have to be sure the property is run on a hotel basis and would have to ensure he or she does not gain preferential treatment from the investment.”

A quick Google search of property and Sipps reveals a plethora of attractive investments next to sun-drenched beaches and far-flung islands. Many of these are advertised on the basis of 100 per cent finance deals or as the opportunity to invest all your pension assets in the one property.

But how many of these are safe investments? Are overseas investments a prudent inclusion in a Sipp?

Lloyd says the key is to pick the properties carefully. “I agree that there have been some problems with properties in Sipps and there are a couple of big outfits out there who are selling product that isn’t Sippable but I have always put my money in property.”

However, Cavendish Young managing director Mark Estcourt says: “Property is not necessarily right for every Sipp investor. I think if anyone was going to invest in property, they would need to know what they were doing and they would need to have a greater understanding of the property market.”

Informed Choice managing director Martin Bamford also says that while there is potential for clued-up investors to profit from property investment, including it as part of a Sipp investment could be risky. He says: “These schemes seem to be trying to get round the Sipp rules, like hotel rooms or overseas property investments, and I think the client is putting themselves at a high level of risk from future complaints and also scrutiny from the FSA and HMRC if they choose to invest in these.

’Property is not necessarily right for every Sipp investor. If anyone was going to invest in property, they would need to know what they were doing and they would need to have a greater understanding of the market’

“Before Sipps were regulated, property investment firms saw them as a way of getting access to quite a lot of pension money. Since they have been regulated, those unregulated property people still want access to that money thanks in part to a limited mortgage market, so it is a risky grey area that they will keep pushing away at.”

While it might be that the right choice of fund or the right choice of property is key to investment success, as is often the case with property investment, the heart leads the head.

AJ Bell marketing director Billy Mackay says: “Property is not only emotive but international property is even more emotive because you attach sunshine, relaxation and all the good things about a holiday.

“But if there is any risk of it being a taxable property, we just don’t go near it. Some providers will look at it. UK commercial property is fine but anything that can run a risk should be avoided.”

Mackay admits that much of the “PR buzz” that surrounded Sipps before A-Day was due to residential property initially being suggested to be a permissible asset but says the last-minute Government U-turn was a blessing in disguise for UK Sipp investors.

He says: “Keeping residential property out of Sipps has undoubtedly meant that people are making more balanced and sensible investment decisions. They will have a more diversified portfolio simply by not allowing investing in residential property.”