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Property prospects

Property bought through a pension scheme can be a sound investment but get specialist advice to avoid the pitfalls

Robert Graves: Head of technical services Rowanmoor Pensions
Robert Graves: Head of technical services Rowanmoor Pensions

The news that the French have changed their laws and they may now recognise trusts may have reignited thoughts of buying holiday homes across the channel with a pension scheme. As a long-term investment, property can offer a good opportunity for capital growth as well as an income stream from rent. In common with most investments within a pension scheme, property investment will be exempt from UK capital gains and income tax.

There are, of course, counter-arguments to individuals investing a high proportion of their pension fund not only in one asset class which is illiquid (that is, property) but in a single property. Perhaps the mantra of investment diversification would suggest that exposure to property as an asset class would best be achieved through appropriate property funds or Reits.

There are some very clear advantages for directors in a company or partners in a firm using their pension schemes to purchase the business premises from which they operate, which has been made easily achievable since A-Day. For example, if the business owns the building already, why not release capital through the pension scheme buying it? Or if renting, why pay rent to a third party when rent can be paid to their own pension scheme?

So, other than the benefits of businesses owning their own commercial premises within their pension plan, what is attracting Sipp, family pension trust and SSAS members to buy other property?

The answer, in the main, must come down to the belief that a particular property represents a good balance bet-ween investment growth and income and the risk that an individual is prepared to take. And that opportunity does not exist through other means. After all, a member buying a property via their scheme should not gain any ancillary benefits of ownership.

Also, residential property is, in effect, outlawed through high tax penalties. So even those that are operating residential buy-to-lets on a commercial basis, with no intent of personal use, would not be able to hold such properties in a pension scheme.

There is growing interest in buying and preserving rainforest
There is growing interest in buying and preserving rainforest

So, what of buying that gite in Brittany with your pension fund, given the change to French law? Unfortunately, no matter where it is located, a holiday home will undoubtedly fall into the category of being residential and therefore taxable. But the law change will hopefully open up the prospect of buying commercial property and land in France.

So, apart from the obvious properties such as shops, factories, or offices, what else is being bought by pension plans?

Within the industry, there are some odd and specific examples such as a football stadium, a museum, a zoo and even an “exotic” bar. However, of more general interest and appeal are hotel investments.

Hotels are not treated as being residential by HMRC and, provided very strict measures are adhered to, individual hotel rooms and apartments can be bought by a Sipp, family pension trust or SSAS.

It is also worth considering land within the gamut of property investment. Owning land in a pension scheme is generally acceptable but again care needs to be taken to avoid owning tangible moveable property.

There has been recent interest in investing in forestry. Owning land upon which trees are grown is fine but any rights to timber must be disposed of before the trees are felled and become timber, which is itself tangible moveable property.

There is also growing interest in owning tracts of rainforest, not for cultivation purposes that could be damaging to the local environment and indigenous population but to preserve it and yet gain income from being able to trade their carbon offset.

Closer to home, UK farmland is proving to be an attractive investment. Purchasing farmland and leasing to a tenant farmer may provide good prospects for capital and income returns. However, owning farmland within a pension plan needs careful consideration as it may get exemptions from certain taxes without it being held in a scheme.

Clearly, there are many different types of property representing varying degrees of investment opportunity and risk. IFAs with clients who are interested in such investments can rest assured that member-directed pension schemes such as bespoke Sipps, family pension trusts and SSASs can take advantage of these opportunities but should use a specialist administrator who understands what is allowable.


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