How can SIPP and SSAS funds be utilised in self-managed property investment syndicates?
Investing in a property-owning syndicate via a self-invested personal pension (SIPP) or a small self-administered scheme (SSAS) can be advantageous from a tax perspective, provided you are clear as to the applicable rules and regulations.
Why is it beneficial to invest in property through a SIPP or a SSAS, rather than directly?
DP: Broadly speaking, because property held in a SIPP or SSAS is income and capital gains tax exempt. In addition, a SIPP or SSAS can borrow up to a maximum of 50% of its net asset value to help fund the property purchase.
Is it true that SIPPs and SSASs should only invest in commercial property?
DP: This is correct, subject to a few exceptions. Residential property attracts punitive tax charges where the investment is a direct investment in the SIPP or SSAS and in almost all cases where it is via an indirect investment through intermediate investment structures.
So in what circumstances can SIPPs and SSASs invest in residential property?
DP: It is possible for SIPPs and SSASs to make an investment into a HMRC tax approved Exempt Property Unit Trust (EPUT) containing residential property assets for capital gains and income tax exemption, but this is subject to the investment fund qualifying as a Genuinely Diverse Commercial Vehicle (GDCV) as defined by HMRC, which places restrictions on the maximum share each pension beneficiary can have in the fund in terms of rights to capital value and income from the fund. PSG is able to structure such a fund to comply with this and other GDCV criteria if there are sufficient likeminded investors, 11 or more as a minimum, all investing equally. This kind of investment fund is not restricted to pension scheme borrowing limitations either, as it is the investment fund making the geared property purchase and not the SIPP or SSAS which will have an interest in units in the investment fund, not the underying assets and liabilities of the fund itself.
Can SIPPs and SSASs invest in all types of self-managed syndicates (such as companies issuing shares, limited liability partnerships, syndicate trusts, co-ownership syndicates etc.)?
DP: This would depend on the type of vehicle and the connection if any to the beneficiary of the SIPP or SSAS which is investing, especially in relation to unquoted shares and overall control. Each structure would need to be examined in detail. Investor status of the underlying pension beneficiary may also be important, as in many cases only High Net Worth Individuals or Sophisticated Investors can participate in such structures, including EPUT.
You have referred to in it passing already, but for the sake of clarity, can you confirm whether SIPPs and SSASs can invest in self-managed syndicates with gearing (i.e. where the syndicate is also funded by bank debt)?
DP: Yes, they can. The EPUT works just as well for geared commercial property or residential property, the former not requiring compliance with GDCV criteria and with the benefit of no limitation on gearing.
What practical considerations should an individual be aware of, if they want to set up a syndicate with a view to receiving funds from SIPPs and SSASs?
DP: Pension tax law compliance requirements (particularly on connected party transactions) should be a primary consideration and also the avoidance of taxable property charges where residential property is concerned; the tax status of the vehicle should match that of the SIPP and SSAS (i.e. be tax exempt) so as to avoid tax leakage and maintain efficiency and whilst exempt unauthorised unit trusts such as the EPUT are capable of tax approval, many other syndicate structures are not. Care should also be taken in respect of regulatory requirements related to unregulated collective investment schemes. My best advice would to work closely with advisors who are knowledgeable and fully conversant with pension tax law and regulatory requirements and an FCA authorised investment fund Manager capable of establishing the tax exempt property investment fund, such as PSG.
And from an Investor’s perspective? What are the practical considerations to be aware of if you want to invest in a syndicate through an existing SIPP or SSAS?
DP: It is important to check out the credentials (including regulatory status) of the fund manager/syndicate provider and also to confirm that your current pension provider will allow such investments as many will not. The value of a flexible and open minded SIPP or SSAS provider with an intimate knowledge of such investment structures should also not be underestimated.
How easy is it for an investor to set up a new SIPP or SSAS? How long does it take?
DP: A SIPP can take up to a few weeks (where it is a regular SIPP already tax registered with HMRC) to a month or so, depending on whether a private family type SIPP is needed which would need to be separately tax registered each time. A SSAS can take 6-8 weeks or possibly longer. The setting up of both a family SIPP and a SSAS are dependent on HMRC and so the speed with which they can be established can be slow. Pension transfers to SSAS and SIPP take time, depend on the speed of the transferring provider and cannot be received into SIPPs or SSASs that require tax registration, until this has been obtained.
I have heard that a SIPP or SSAS can actually be a syndicate (rather than just invest in one). How does that work?
DP: A SSAS is automatically a syndicate in a way, as it is a common trust fund and all funds are essentially collected for co-investment by default. Our family SIPP (Open SIPP) can be adapted for syndicated investment with a simple trustee resolution enabling several members in the SIPP to join together in a common investment fund within the SIPP.
Finally, aside from self-managed syndicates, are there any other structures that are commonly used to allow SIPP or SSAS funds to invest in commercial or residential property?
DP: Only really the EPUT as previously discussed, which is a very specialist structure but capable of being granted direct tax exempt status by HMRC which is not the case for most other types of structure.
Duncan Parsons, Commercial Director at the Pensions Solutions Group Telephone: 01249 280024 Email firstname.lastname@example.org
Download our guide to setting up and running a Property Syndicate or Investment Club