How to use a SSAS or SIPP for Property Investments.
(With Notes on Residential Property Too!)
Using your pension to invest into UK Property is seen as being the ultimate in tax efficiency – as the pension pays no taxes on rental income or capital gain made on sale. However, using a SSAS (Small Self Administered Pension Scheme) and/or a SIPP (Self Invested Personal Pension) will introduce UK Pensions Rules, which might restrict what the investor wants to do in the long-term. This Article will go over those issues and give you some thoughts as to what can be done about them in order to maximise your property investments and overall tax efficiency.
First up – Residential Property:
Neither a SSAS or a SIPP are allowed to invest into ‘residential’ property, so your investment choices are limited to investing into commercial property. However, if a SIPP is transferred into a SSAS the SSAS fund can elect to invest into a special type of Unit Trust, which we call an X-PUT. This is an “Excluded Property Unit Trust” where the “X” will either be “E”, “G” or “J” depending upon the chosen jurisdiction of the Trust (England, Guernsey or Jersey).
The pension is now invested into “Units” rather than “Property” and as such the Unit Trust can invest into a mixed portfolio of property types, including residential property.
Care needs to be taken to ensure that the structure between the SSAS and the XPUT is correctly put in place – which is where our property tax experts can assist.
Next – Lending:
When a SSAS or SIPP looks to buy property there are strict rules on how much each is allowed to borrow in order to complete on the property purchase. The limit is 50% of the value of the assets within the SSAS/SIPP.
So – if a SSAS contained £100,000 cash. It could raise £50,000 (50% x £100,000) as a mortgage to allow it to buy a commercial property with a completion value of £150,000. Where the property is VAT registered and the completion value includes VAT – this must be INCLUDED in the £150,000 overall borrowing limit.
Of course, if the SSAS owned Units in the XPUT – the £100,000 would now be within a structure that is NOT a “pension” and therefore the 50% borrowing limit would not apply. The XPUT would be constrained by commercial rules and limits on lending based on rental income and what lenders would be prepared to lend to the Unit Trust.
Many SSAS investors have property where they want to access some of the ‘equity’ – but the 50% borrowing limit has been hit. By moving the property into the Unit Trust in exchange for the Units, the lenders can often increase their facility and cash is raised within the Unit Trust. These funds can be passed back to the SSAS, which in turn can even lend the cash to the Sponsoring Employer to assist with their business cash-flow (instead of reaching out to COVID-19 lenders or other banks where interest leaves the ‘pot’. Remember that a loan to the sponsoring employer from the SSAS will earn interest for the SSAS.
Finally – Lifetime Limit…
The Lifetime Limit is a capital value imposed by HMRC on the size of a pension fund. Once it exceeds £1,073,100 (2020/21) there will be additional taxes to pay, which make having a larger pension fund less attractive. Some schemes have ‘protections’ in place where they can exceed this figure, but that is another subject and outside the scope of this brief article.
However, there are some basic principles that might prove useful. A SSAS is defined as an ‘un-earmarked’ fund – which means that if there are 3 “Members” the total value of the fund is not attributed to any specific person, and as such is not able to be used to calculate if the “Lifetime Limit” has been reached. It would only apply when benefits are being calculated and paid out. Adding Family Members to the SSAS allows for greater flexibility as there are now larger numbers of people in the scheme and each will have their own “lifetime” limit. Where adult children are involved, this is also a way to pass funds onto the next generation without any Inheritance Tax applying.
If you have a pension that is at risk from hitting the lifetime limit in the future – because of the amazing profit that your investments are making (!) – then there’s an opportunity to use a parallel arrangement which acts as a ‘freezer’ scheme. Instead of earning 8% p.a your SSAS investments can be fixed at a low rate, such as 1% p.a. If this is done, the funds will never reach the Lifetime Limit because the limit itself is increasing by MORE than 1% p.a. The residual growth of the investments in the SSAS would fall within an alternative tax exempt structure, which has no Lifetime Limit. In this way you can have £1m in the SSAS and £8m in the other structure – all within the allowable limits and as an added bonus, the alternative structure is also HMRC approved and allows residential property too. (The best of both worlds!).
Another principle is that of annuities. Where a pension of any type (SSAS, SIPP or Defined Benefit Scheme) buys an annuity, it is the purchase price of the annuity that is tested against the Lifetime Limit. If that annuity is a self-invested one, the growth within the annuity is nothing to do with the SSAS or SIPP or indeed pensions rules at all. It is a commercial arrangement and the annuity provider can increase income payments based on the underlying size of the fund… which over time might exceed the £1.073m allowed. However, buying an annuity might not be appropriate and the age of the investor might not allow it. Again, it is a tool that can be used – but only where appropriate.
Transferring a SSAS or SIPP into an offshore QROPS (Qualifying Registered Offshore Pension Scheme) is classed as a ‘crystallisation’ event in relation to the Lifetime Limit. This means that the value of the SSAS/SIPP at the time of the transfer comes off your allowable total. BUT – all future growth is now OUTSIDE the Lifetime Limit and your £750,000 can grow to £2m without any issues. As this is a complex area that requires formal FCA Approved advice, we need to stress that this article should not be taken as ‘advice’! We are simply saying that this is a principle that can be applied as needed.
Many business owners are unaware of the rules or how they can use their pensions – which is where we can help.
Paul Stewart (Our MD) is a Pensions Administrator (an official HMRC recognised role). He was also an Examiner for the Chartered Insurance Institute dealing with the exams IFA’s had to pass in order to give advice on …PENSIONS! So if there is anyone who can help guide you, then he can!
Most Advisors, such as IFA’s and Accountants do not have the internal experts to assess a client’s FULL situation – and come up with the best overall strategy.
As I have worked in the pensions and tax planning field for over 30 years, I have personal access to experts in all taxes and can combine these experts into a unique service that really does go beyond what you’d get from your normal ‘Advisors’.
Every wealthy entrepreneur or property investor I have ever met had their own Accountant, Solicitor and Financial Advisor – yet in 90% of cases we were able to dramatically able to improve their overall exposure to UK taxes and access to their pension money.
What is vital is the proper implementation – with care at every stage.
This is why we offer a FREE consultation – as it lets us explore your current situation before jumping in with ‘solutions’.
If you are interested in seeing if your pension can be used to help support your business – then call us now, or send us your details and we will call you back.
We look forward to helping you soon.