2013 sipp property guide - investment sense · 18 property management 19 property development 20...

SIPP Property Guide2013

SIPP

CONTENTS

Introduction 03 About this guide

04 Tax-efficiency of pensions

05 General principles

Purchasing property 07 Purchasing property 08 Suitable property investments 09 Financials 10 Value Added Tax (VAT) 11 Stamp Duty Land Tax 12 Legals 13 Mortgages 15 Joint purchases

Managing property 16 Leasing 18 Property management 19 Property development 20 Selling a property

Residential property 21 Definition 22 Exemptions 23 Tax consequences

Further information 24 Barnett Waddingham SIPP Property Costs 26 The parties involved 27 Summary of potential risks 28 Glossary and explanation of terms

Introduction

About this guideThis guide explains how you can use a Barnett Waddingham SIPP to invest in commercial property.

This guide should be read in conjunction with the following Barnett Waddingham SIPP documents:

Trust Deed and Rules Terms and Conditions Key Features Guide Investment Guide Property Questionnaire Fee Schedule

We will not give advice on the suitability of property investments. You should take independent specialist advice where appropriate, including advice on any specific risks attached to any property purchase, sale or transfer.

The Barnett Waddingham SIPP is one of the most popular SIPPs for property transactions, with over 800 properties in our portfolio as of 31 December 2011. We estimate that the property held within Barnett Waddingham SIPPs is worth circa £370m.

Almost half of these properties are jointly owned with third parties and we have built up significant expertise in this field.

We are therefore confident that our SIPP is chosen to hold property because we have the expertise and the flexibility to accommodate modern pension property transactions.

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Barnett Waddingham SIPP - Property Guide


Tax-efficiency of pension property purchase

Buying commercial property with pension savings has proved a popular choice in past years due to the income generated and usually low capital value volatility. Whilst both rental streams and capital values are subject to market fluctuations, direct investment in land and commercial property remains an attractive proposition for many SIPP investors.

Property owned by a Barnett Waddingham SIPP can be used by your business, and often is. As such, property investment is closely monitored by HM Revenue & Customs (HMRC) to check, amongst other things, that transactions take place at fair value.

Purchasing a property using pension savings is tax-efficient compared with a personal purchase as you can get tax relief on pension contributions, meaning that you can purchase the property at a lower net cost.

Furthermore rental income and capital gains are tax-free within the SIPP.

You should discuss the relative advantages, disadvantages, likely costs and risks with a Financial Adviser before deciding to invest in commercial property.

ExampleYou have found a property that would be perfect for your business to use. The property would cost £240,000 to buy.

Rather than use up scarce company cash, you use existing pension savings together with a tax-relievable contribution to build up a fund of £240,000 within your SIPP to make the purchase.

The company leases the property from your SIPP at a market rent, determined by an independent valuer.

General principles

Can my Barnett Waddingham SIPP buy any type of property?Commercial property, industrial property and land are acceptable types of property investment for SIPPs. Residential property other than in certain very limited circumstances is subject to tax charges designed to negate the benefit of the tax relief enjoyed by SIPPs and as such is not a permitted investment within the Barnett Waddingham SIPP.

What is meant by residential property?Generally speaking, any property that is suitable for use as a dwelling, but please see the section on residential property for more detailed information.

Is commercial property a good investment for retirement?Most people start planning pensions some years away from retirement. Commercial property has proved a good investment for SIPPs over the longer term.

However, it is not always a good investment and in recent years some landlords have had to accommodate requests for lower rents, which are then reflected in lower property valuations.

Direct investment in property is illiquid, meaning that it can take time to sell. Even in normal market conditions, it can take many months to sell a property, which could be frustrating when there is an urgent need for cash.

If a property cannot be let, there would be no income on the investment. Tenants can be unreliable and managing let properties is not straightforward.

Finally, you should be aware that putting all your eggs into one basket - property, for example – increases the investment risk for your pension scheme.

Could the whole of my Barnett Waddingham SIPP be invested in commercial property?Legally yes and we will accommodate this within the Barnett Waddingham SIPP. You should be aware of the risks mentioned above about lack of investment diversification, illiquidity and potential cashflow problems as you will need some liquidity to cover insurance, repairs, other fees, etc.

Can my Barnett Waddingham SIPP participate as a joint owner of a property? Yes – and with the Government reducing the maximum that can be paid into a pension each year, this is set to become increasingly common.

A Barnett Waddingham SIPP can jointly own a property with another Barnett Waddingham SIPP, the member, other individuals or companies and even other pension schemes if the other pension provider can accommodate this.

The joint owners do not have to hold equal interests in the property.

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For how long could the pension scheme hold a property?There is no time limit. However, because property is not a liquid investment, you ought to have a clear view as to the term over which the investment is to be held. If you are receiving a pension, liquidity issues also need to be taken into account.

Can my Barnett Waddingham SIPP buy a commercial property already owned by me, my company or anyone connected with me?Yes, provided that the purchase price is in accordance with a written independent valuation.

A proper conveyance is required and you may be subject to capital gains tax. Your Barnett Waddingham SIPP will be liable for any Stamp Duty Land Tax (SDLT) due on the transaction.

Can I simply transfer existing property into my Barnett Waddingham SIPP?Yes, though this is more complex and no more tax-efficient than making a cash contribution and then purchasing the property from you – though it might help with cashflow.

The transfer of property will be treated as an “in specie contribution” and certain procedures will need to be followed, including assessing the value of the property for the purposes of determining what level of tax relief is available.

If the value is above the maximum level of tax relief available, then the transaction might have to take place in stages or relief not granted or a tax charge applied.

Who is considered as a connected party?Generally, you, your immediate family and any business that you or your family control is considered a connected party. The definition is slightly wider than this and so you should confirm with us if you have any form of relationship with another party with whom you are transacting.

ExampleIn the previous example, it might transpire that the Barnett Waddingham SIPP only has £200,000 at its disposal after paying in the maximum contribution for the year.

The Barnett Waddingham SIPP therefore purchases the property jointly with the company. It pays £192,000 for an 80% share. The company pays the SIPP 80% of the market rent.

Next year, the Barnett Waddingham SIPP purchases the remaining 20% of the property from the company funded by that year’s pension contribution.

The company could make the contribution in cash or in specie.

Purchasing property

Key steps

Once you have identified a property, the steps are:

• Assess the financial feasibility – we can assist

• Complete the Barnett Waddingham SIPP Property questionnaire

• Await our confirmation that the property meets our SIPP requirements

• Appoint a solicitor and valuer

• Deal with any environmental issues

• Liaise with the solicitor to confirm total costs

• Revisit financial feasibility if need be

• If borrowing required, agree terms with lender

• Liaise with both Barnett Waddingham and solicitor throughout conveyancing

Contracts will not be entered into until we have approved the purchase and there are sufficient funds to cover the purchase costs including VAT, SDLT and expenses.

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Suitable property investments

How do you assess whether a particular property investment is permitted?You will need to submit a Barnett Waddingham SIPP Property Questionnaire to us. We will then give an initial view as to whether the property is a viable investment for your Barnett Waddingham SIPP, in terms of it not being classed as residential property.

Our initial assessment may be revised as later information emerges – for example if a valuation subsequently reveals a residential flat as part of the premises.

If the purchase involves a connected party, we will need to see an independent valuation in writing supporting the transaction price.

Does the property have to be freehold?No. Leasehold, freehold or commonhold property would be quite acceptable, although it may be difficult to arrange mortgage finance on a short-term leasehold.

If the property is not residential property, are there any other reasons why a purchase might not be permitted?Yes. It may be that you do not have sufficient assets to make the purchase, or that a potential lender will not make an offer.

Additionally, it may be that there are other factors, such as environmental issues, that make a purchase impossible.

Environmental concerns include the potential for contaminated land and asbestos. If issues are raised, we will take advice from the solicitor and may decline to proceed with the purchase if the issues cannot be resolved or if you do not wish to fund such further investigations or remedies, such as additional insurance cover.

What about properties with existing leases?Commercial property with existing leases can be bought subject to our normal terms.

Note that all lettings to connected parties must be on commercial terms approved by a surveyor and solicitor and we would recommend that a similar process is undertaken for unconnected parties.

What about vacant properties?Vacant properties must normally be let from completion under a formal lease, though provided there is an expectation of letting in the future, we do not require this as a condition of purchase.

Can I buy a property at auction?Please contact us in advance to discuss this niche requirement. This is not always possible but there may be circumstances in which we can accommodate this and we would only be able to authorise capped bidding on a particular property.

Financials

The financial considerations?The purchase will also need to be financially viable. The responsibility for the affordability of the purchase will rest with you but we will check that there are expected to be sufficient funds, using borrowing up to the maximum permitted if necessary, to finance the purchase costs including SDLT and VAT as advised by the solicitor.

Does the pension scheme have to pay tax on the rent it receives?No. One of the main attractions of the pension scheme owning the property is that the rent is tax-free.

Does UK tax have to be deducted from the rent or can it be paid into my Barnett Waddingham SIPP gross?Tax need not be deducted on UK property. However, VAT will be added to the charges made by any property manager who is engaged.

When will I need a property valuation?The property will need to be surveyed and valued before purchase, as well as on various events such as when you wish to draw benefits.

Valuations must be conducted by a member of the Royal Institution of Chartered Surveyors (RICS).

Generally, the RICS Surveyor will be your choice. However, there may be occasions when either a bank (e.g. for lending purposes) or BW SIPP LLP (e.g. to ensure the appropriate rent is being paid) will need to instruct a Surveyor. Any costs associated with this will be met from funds held under your Barnett Waddingham SIPP.

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Value Added Tax

As VAT is a complex area, and may affect the running of your Barnett Waddingham SIPP, we strongly recommend that you obtain independent professional advice in this area.

When might a property be subject to VAT?The purchase price of a property may be subject to VAT if:• the vendor previously chose to subject the property to VAT• the property was built within the last three years.

It is important to note there are circumstances where a property may not be subject to VAT.

What if the property is subject to VAT?If the property is subject to VAT on the acquisition cost, the rent payable will also be subject to VAT. SDLT is charged after VAT has been added on, even if the VAT can be claimed back.

Can my pension scheme register for VAT and so reclaim the VAT paid?It may be possible for your Barnett Waddingham SIPP to reclaim the VAT if you decide that the property should be subject to VAT, but even so the delay between paying the VAT and reclaiming it might create cashflow difficulties and so will need to be considered. You may be able to resolve this if the purchase is a “Transfer of a going concern”. Your adviser will be able to give you more information on this.

You must let us know how the property is to be treated for VAT purposes by completing the relevant section in the Barnett Waddingham SIPP Property Questionnaire. We cannot advise you on VAT and will follow the instructions of the solicitor.

Remember that if the property is subject to VAT then VAT would need to be charged on the rent and on the consideration for any subsequent sale, which may reduce the attractiveness of renting or purchasing the property by a non VAT registered entity.

What about VAT on rental income and sale proceeds?If the property is subject to VAT, it will also be payable on rental income and also charged on the subsequent sale price.

Purchase price/lease premium or transfer value SDLT rate

Up to £150,000 - annual rent is under £1,000 Zero

Up to £150,000 - annual rent is £1,000 or more 1%

Over £150,000 to £250,000 1%

Over £250,000 to £500,000 3%

Over £500,000 4%

Stamp Duty Land Tax

Will the Barnett Waddingham SIPP have to pay SDLT?Normal SDLT rules apply and the purchaser, being your Barnett Waddingham SIPP, is responsible for settling any SDLT due. The rates at the time of writing for non-residential properties are:

Note that for the above purpose the annual rent is the highest annual rent known to be payable in any year of the lease, not the net present value used to determine any tax payable on the rent.

Is SDLT payable on the rent?When a new non-residential or mixed use lease has a substantial annual rent, SDLT is payable on both the lease premium or purchase price (as per above table) and the net present value of the rent payable if it exceeds £150,000 (the rate being 1% of the excess). Your solicitor will advise on this.

What rules apply for buying your company’s premises?The transaction would have to happen at market value, as though it were an arms’ length transaction, and would go through a proper conveyance. Usual SDLT and VAT considerations would apply. To evidence the market value, there should be an independent property valuation supporting the transaction price.

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Legals

Will a solicitor be needed to convey the property?Yes. Only a solicitor or a licensed property conveyancer can do this task. The Solicitor acting on behalf of your SIPP will examine the Title Deeds and make sure there are no major problems with the Barnett Waddingham SIPP taking title. If your SIPP is borrowing to purchase, the Solicitor may also check that the property/land is suitable security for lending purposes. However the Solicitor acting for the Lender will also want to check this.

Can I choose which solicitor to use?Yes, we allow you to select a solicitor to act for your SIPP. If your SIPP is buying a property from you, your company or someone connected with you, they may not want to act for both the vendor and purchaser.

Are there any special requirements as the purchaser is the Barnett Waddingham SIPP?It will need to be clear that the purchase is in the name of your SIPP and not you personally. Also, as our SIPP trustee acts for many SIPP members, it is necessary to restrict any liability arising from the transaction to the particular SIPP that is involved.

We therefore require clauses to be included in the purchase documentation and we will need to liaise with the solicitor regarding this. We cannot agree to a property transaction without this.

Who will be registered as the property owner?The SIPP’s property investment will be registered on the land registry. The property could be registered either in the name of BW SIPP Trustees Limited only or jointly with the member (or members where there is a joint purchase). If the former, we would expect a restriction on the register that no transaction can take place without the consent of the member(s).

ExampleIf there were £200,000 in your SIPP, the SIPP would be able to raise a mortgage of no more than £100,000, limiting property investment to £300,000.

Following the property purchase, the SIPP will have an asset of £300,000 and a mortgage of £100,000 giving a net value of £200,000. As the mortgage is already at the borrowing limit, no further borrowing would be possible at that time.

Mortgages

Can the Barnett Waddingham SIPP borrow to help meet the cost of the property?Your Barnett Waddingham SIPP can take out a mortgage to help meet the purchase price. The amount of the mortgage is subject to a strict HMRC limit. The mortgage must not exceed 50% of the net value of your SIPP at the time the loan is granted. However, some lenders may restrict this to a lower amount based upon other factors such as the value and type of security offered.

Are there any special requirements as the borrower is the Barnett Waddingham SIPP?As our SIPP trustee acts for many SIPP members, it is necessary to restrict any liability under the mortgage document to the particular SIPP that is involved. We therefore require clauses to be included in the mortgage agreement and we will need to liaise with the solicitor regarding this.

This is to ensure that the lender can only obtain money from the assets of your Barnett Waddingham SIPP and not the assets of other people’s SIPPs or our trustee company or associated companies if the proceeds from the sale of the property are insufficient to repay the borrowing.

Certain lenders may require your Barnett Waddingham SIPP to maintain a suitable cleared balance in a designated SIPP bank account to cover on-going capital and interest repayments. This will vary from lender to lender.

Who can your Barnett Waddingham SIPP get a mortgage from?The Barnett Waddingham SIPP can borrow from any source, including yourself. You, acting on behalf of your Barnett Waddingham SIPP, would usually approach a commercial lender for a mortgage. Alternatively, the Barnett Waddingham SIPP could request borrowing from yourself, your business or connected businesses, your relatives or even a third party.

Can I personally lend money to my Barnett Waddingham SIPP?Yes - but you must do this on ‘arms’ length’ terms. In other words, your Barnett Waddingham SIPP should pay interest to you at around the same rate that a commercial lender would charge. However, you may not lend money to your Barnett Waddingham SIPP if it has already got a mortgage up to the HMRC’s limit of 50% of net value mentioned above.

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ExampleSuppose the property above had increased in value to £340,000 and over the same period the mortgage had been reduced to only £60,000. That means that the net value of the SIPP has grown to £280,000.

This means that the mortgage limit has become £140,000. This is £80,000 more than the present mortgage of £60,000. However, if there have been no additional contributions in the meantime, it might still be difficult to have sufficient funding to purchase a second property.

ExampleIf a property has been purchased for £300,000 with a £100,000 mortgage, the rent might be, say, £21,000 per annum (about 7% of the value of the property).

The mortgage payments at, say, a 5% rate of interest on £100,000 would be about £6,500 per annum. So the rent in this example covers the mortgage with plenty of room to spare.

However, if the tenant defaults on the rent or requests a rental holiday, the mortgage would need to be serviced by selling other investments or making new contributions to your Barnett Waddingham SIPP.

If the mortgage is not serviced, the lender could take steps to force a sale of the property.

How do I pay back the mortgage?Mortgage repayments are made from the rent paid by the tenant and from any future pension contributions that might be made.

What happens if the rent does not cover the mortgage?Because of HMRC’s tight limit on the amount of mortgage being no more than 50% of the net value of your fund, it is likely that the rent on the property will more than cover the mortgage. If it does not, the Barnett Waddingham SIPP will still be liable for the mortgage payments and may need to sell the property (or other assets if available) to pay off the mortgage.

Can I buy a second property before I have paid off the mortgage on the first one?Yes - but at all times your Barnett Waddingham SIPP will have to respect the HMRC limit on the mortgage - namely 50% of the net value of the SIPP.

Joint Purchases

How can my Barnett Waddingham SIPP be involved in a joint purchase?As noted earlier, you can use your Barnett Waddingham SIPP as one of the parties to a joint property purchase.

The Barnett Waddingham SIPP would participate as a tenant in common with the other purchasers and would sign up to a Declaration of Trust or similar document that would set out the ownership percentage for each participant and various rules such as what would happen if one purchaser wanted or needed to sell their share in the future.

This is important as, for example, the Barnett Waddingham SIPP may need to realise funds quickly to pay death benefits in a tax efficient manner.

What experience does Barnett Waddingham have in dealing with joint purchases?In 2011 we assessed that we had some 800 properties held within Barnett Waddingham SIPPs of which 45% of these had more than one owner, as shown in the graph below.

1 BWSIPP

2 BWSIPPs

3 BWSIPPs or more

With external investors

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55%

23%

14%

8%


Managing property

Leasing

What form of tenancy agreement will I need? The type of tenancy agreement most appropriate to commercial property is a full ‘repairing and insuring’ lease drawn on commercial terms. Where a new lease is to be granted, we have a standard lease which must be used.

However, it is possible to arrange a Licence to Occupy, particularly for a relatively short-term let, as an alternative to a formal lease. The position can be complicated, particularly in relation to security of tenure under the Landlord & Tenants Act and so advice from the Solicitor should be sought.

Would the lease include rent reviews?It is normal commercial practice for a lease to include provision for rent reviews, at either given calendar dates or fixed intervals (i.e. on the fifth anniversary). Reviews can be either flexible, in that the rent is reassessed in line with the market, or upward only, where only any increase is taken into account when setting the new rental level.

Who pays any service charge or ground rent?These would normally be paid by the landlord namely the Barnett Waddingham SIPP trustees, although service charges can be passed to the tenant if the lease permits this.

Who would insure the property? It is essential that all investments in property are properly insured. To ensure that appropriate cover is put into place and maintained, this would normally be arranged by the landlord, namely BW SIPP Trustees Ltd. However, the lease can provide for the insurance premium to be charged as additional rent to the tenant.

Who pays for repairs and maintenance? The property must be kept in good repair at all times. This would normally be the responsibility of the tenant under the terms of the lease.

Where is the rent paid? Rent is paid to an account with your property manager or directly to your Barnett Waddingham SIPP account. Where there is a joint property purchase an additional bank account will be set up in respect of the joint owners of the property. This account will be used for all income and expenditure in respect of the jointly owned property and will be shared by the participants in the same proportion as the property shareholding.

Can my business use the property? Yes, there is no restriction on the tenant. However, the tenant should always pay a fair ‘arm’s length’ rent, and it will be particularly important to ensure that the rent is fair where the tenant is ‘connected’ to the member of the Barnett Waddingham SIPP.

What happens if a third party tenant does not pay the rent?Court action would need to be taken to terminate the tenancy for non payment of rent. The landlord can, of course, act commercially and come to an agreement with the tenant such as agreeing to a repayment schedule or a rental holiday.

What would happen if my business uses the property and does not pay rent? Tax charges apply on the company and your Barnett Waddingham SIPP if the company is not paying a commercial level of rent for the use of its premises. The tax charge is typically 40% of the underpaid rent charged on the company and 15% on your SIPP, though it could be higher in certain circumstances.

If there are genuine financial difficulties and the company cannot afford the rental payments, then provided the Barnett Waddingham SIPP trustees deal with the company on an ‘arms’ length’ basis, then tax charges could be avoided. We will notify HMRC of any underpayment as part of our duty as scheme administrator.

Can the property be sublet or a lease surrendered?There are no overriding pension rules that prevent this but any transactions between your Barnett Waddingham SIPP and a connected party must occur at market rates.

Are there any special requirements as the purchaser is the Barnett Waddingham SIPP?As BW SIPP Trustees Ltd acts for many SIPP members, it is necessary to restrict any liability arising from leasing the property to the particular Barnett Waddingham SIPP that owns the property. We therefore require clauses to be included in the purchase documentation and we will need to liaise with the solicitor regarding this. We cannot agree to a lease without this. If it is not possible to include this restriction within the lease terms, we would ask for a deed to be signed by you indemnifying the SIPP from any liabilities.

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Property management

Can I act as manager for my own pension property?Yes, although you should be formally appointed as the property manager for your Barnett Waddingham SIPP. We can provide specimen documentation for this.

We will require several safeguards to make sure that we are not responsible for any shortcomings or omissions by you as the manager. This will include an indemnity from you to the trustees and the trustees would expect an annual report from you confirming that all the appropriate management responsibilities have been addressed. Furthermore, the trustees are likely to insist on full liability insurance being in place.

Can I pay myself a management fee?Yes, but it must be reasonable. If HMRC decides an unreasonable or excessive amount has been paid to you as a management fee, then they can impose a tax on the Barnett Waddingham SIPP and on you for what they would regard as unauthorised payments. The rate of tax on you is 40%, with a further tax on the Barnett Waddingham SIPP itself of typically 15%.

Who will guide me through the various regulations?There are real responsibilities on landlords of properties and it is for this reason that it would normally be recommended for there to be an experienced professional manager taking responsibility for these issues. Most firms of chartered surveyors and estate agents usually provide these management services.

Who would deal with any problems or disputes that arise with tenants?This is ideally the job for the experienced, professional property manager.

How do I take financial references on tenants?This would be carried out through a credit reference agency with the written consent of the tenant.

Property development

Can I buy a property ‘off plan’?Yes. It is possible to buy a new property from a developer before it is actually built.

What happens if I want to redevelop or extend the property at a future date? You would need to ensure that the costs of the redevelopment or extension can be met either from the cash accumulated in your Barnett Waddingham SIPP, or within the limit on mortgages mentioned previously.

Of course, any extensions would be subject to the usual planning and building regulations approvals.

Can I use my Barnett Waddingham SIPP to redevelop the property for onward sale? Yes. However, note that such activity could be regarded by HMRC as ‘trading’. SIPPs are not prohibited from trading but trading profits would be subject to corporation tax.

Can my Barnett Waddingham SIPP apply for a change of use to permit residential development?Your Barnett Waddingham SIPP may invest in property where there is, or may be, future consent for a change of use to permit residential development, although such activities could be classed as trading.

There is nothing to prohibit your Barnett Waddingham SIPP from owning land or buildings with residential planning consent, provided that the buildings themselves are not residential (see the following section).

Opinion differs on the exact point at which a property becomes residential. Our understanding is that as soon as the property is suitable for use as a dwelling, then it is classified as residential. This means, for example, that property must be sold prior to obtaining a habitation certificate.

Can my company do the work?Your company is able to do the work or arrange for the work to be undertaken, provided that it can be demonstrated that it is charging a fair price. This would usually be evidenced by obtaining quotations from other companies or if there is a clear standard charging basis that your company employs across its client base.

If you are arranging development or fit-out work yourself, bear in mind that your Barnett Waddingham SIPP should not own items of “tangible moveable property” such as carpets, cookers, furniture but is able, in our view, to own property that includes fitted carpets and fitted kitchens. It is difficult to lease a furnished office through your Barnett Waddingham SIPP and you should discuss this with us in advance if you consider this necessary.

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Selling a property

Is there any Capital Gains Tax when the property is sold?No. This is one of the advantages of holding property in a tax registered pension scheme.

Will a solicitor be needed to convey the property?Yes. Only a solicitor or a licensed property conveyancer can do this task.

Can I choose which solicitor to use?Yes, we allow you to select a solicitor to act for your Barnett Waddingham SIPP.

Are there any special requirements as the vendor is the Barnett Waddingham SIPP?As BW SIPP Trustee Ltd acts for many SIPP members, it is necessary to restrict any liability arising from the transaction to the particular Barnett Waddingham SIPP that is involved. We therefore require clauses to be included in the purchase documentation and we will need to liaise with the solicitor regarding this. We cannot agree to the sale without this.

If your Barnett Waddingham SIPP is VAT registered, who is responsible for the VAT advice and issuing VAT invoices?We would expect the solicitor to manage the sale process and request from us a VAT invoice at the appropriate time.

What rules apply for selling to a connected party, such as me, my company or my family?The sale would have to happen at market value, as though it were an ‘arms’ length’ transaction. To evidence the market value, there should be an independent property valuation supporting the transaction price.

Residential property

Definition

What is meant by residential property?HMRC set out that residential property can be in the UK or elsewhere and is:

• a building or structure that is used or suitable for use as a dwelling;

• any related land that is wholly or partly the garden for the building or structure;

• any related land that is wholly or partly grounds for the residential property and which is used or intended for use for a purpose connected with the enjoyment of the building;

• any building or structure on any such related land;

• in limited situations a hotel, which includes an inn, or similar accommodation, will be counted as taxable property though this will only be where it provides accommodation rights such as timeshare; or

• a beach hut.

Ground rents over residential property are also treated as being residential property.

HMRC have not given further guidance on what is meant by “suitable for use as a dwelling” but we understand that they will use certain indicators as evidence that a property is classified as residential such as whether SDLT is payable at residential or commercial rates and whether council tax or business rates are due. A flat that is rented out as a commercial venture to students still counts as residential property, even though you may not have use of the property.

A house that is being used wholly or partially as an office will still be treated as residential property.

What is an indirect holding of residential property?An indirect interest in taxable property will be held through a “vehicle”, i.e. a person or entity through whom your Barnett Waddingham SIPP holds the property, and will be taxed in the same way as if your Barnett Waddingham SIPP held the property directly.

So, if your Barnett Waddingham SIPP holds 100% of the share capital of a company which itself owns residential property, then the company through which your Barnett Waddingham SIPP owns the property is the “vehicle”.

An indirect interest in residential property can be held via a wide variety of types and sizes of vehicles or structures including collective investment schemes, unit trust schemes, unauthorised unit trusts, exempt unauthorised unit trusts, open ended investment companies, closed ended companies, investment trust companies, insurance policies and contracts, trusts, depository interests, or exchange traded funds.

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Exemptions

Are there any exemptions as to what is residential property?HMRC have clarified that a building used for any of the following purposes is not residential property:

• a dedicated children’s home or other institution providing residential accommodation for children;

• a hall of residence (not flats) for students;

• a home or other institution providing residential accommodation with personal care for persons in need of personal care by reason of old age, disability, past or present dependence on alcohol or drugs or past or present mental disorder;

• a hospital or hospice; or

• a prison or similar establishment.

If a building is not currently in use then if it was last used for one of the non-residential purposes set out above then it is not treated as residential property. If the building has never been used and is more suitable for one of the uses specified above than for any other purpose it is not treated as residential property regardless of its suitability for use as a dwelling.

Furthermore, certain “job-related” accommodation will not be treated as residential property.

What is “job-related” accommodation?There are two categories of “job-related” accommodation:

The property is (or, if unoccupied, is to be) occupied by an employee who:

• is neither a member of the Barnett Waddingham SIPP nor connected with such a member,

• is not connected with the employer, and

• is required as a condition of employment to occupy the property.

An example is a caretaker’s flat.

The property is (or, if unoccupied, is to be):

• occupied by a person who is neither a member of the Barnett Waddingham SIPP nor connected with such a member: and

• used in connection with business premises held as an investment of the pension scheme.

An example is a pub with landlord living above.

Are there any exemptions of indirect holdings of residential property?Residential property held through genuinely diverse commercial vehicles (GDCVs) will not be subject to tax charges. HMRC list three categories of GDCV:

• UK Real Estate Investment Trusts (REITS);

• Trading Concerns;

• and “other kinds of vehicle”.

These do not allow ’for example’, a second home to be purchased simply by packaging it within a single purpose vehicle, but aim to allow large syndicates with a diverse portfolio of properties to be available to be invested in. Certain conditions need to be met and whilst we will aim to check these we cannot be responsible for any failure by the provider of the GDVC in failing to meet the conditions where their product is being marketed as being a permitted investment for your Barnett Waddingham SIPP.

Tax consequences

What are the consequences of investing in residential property?If your Barnett Waddingham SIPP is holding, either directly or indirectly, residential property then there are tax charges on the purchase price, tax charges on the income and tax charges on the capital gains. Our Trust Deed and Rules do not allow investment in residential property because of these tax charges. However, if your Barnett Waddingham SIPP is deemed to be owning residential property, the tax charges will fall due to your Barnett Waddingham SIPP.

If your Barnett Waddingham SIPP owned residential property prior to 6 April 2006 then you should seek appropriate professional advice to make sure that you are not deemed to have invested in residential property under the new rules.

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Further information

Barnett Waddingham SIPP Property Costs

What costs are associated with holding property in a Barnett Waddingham SIPP?There are costs associated with purchasing, renting, managing, developing and selling property both in relation to our fees for our involvement in those processes and fees charged by other professionals such as solicitors, surveyors, managing agents, estate agents and developers and costs that you would usually expect with direct property investment.

We set out below a summary of how we charge for our involvement.

For further details please see our Barnett Waddingham SIPP Fee Schedule.

How do you calculate fees for property purchases?Our fees are principally time based reflecting the time expended and the degree of responsibility involved. This is necessary as commercial property purchases vary significantly in their level of complexity.

As such, we cannot agree a fixed fee for this work and the estimates given in the Barnett Waddingham SIPP Fee Schedule are constructed assuming the purchase of a single-tenanted property and that the purchase proceeds without undue complication and allowing for approximately 4 hours of a Client Manager’s time.

We will usually instruct the solicitor and valuer of your choice, giving you the opportunity to negotiate rates with them directly.

Their fees, together with all disbursements relating to the acquisition, sale or management of any property, are payable from your Barnett Waddingham SIPP in addition to our fees.

Ancillary work, such as providing information on the finances of the property purchase or advising on how to avoid owning residential property within the Barnett Waddingham SIPP are also charged on a time cost basis and are not included in our fee estimates.

If a purchase fails to complete, you will still be charged for the work undertaken.

What is the additional charge for purchasing a property with a mortgage?If your Barnett Waddingham SIPP borrows to purchase property, the initial costs of dealing with the mortgage will be charged for principally on a time cost basis as part of the overall purchase process.

There will also be an annual mortgage fee due in relation to our work in dealing with the mortgage or any rearrangement. Additional fees will be charged on a time cost basis should the borrowing be varied, such as partly or fully repaid.

What additional property purchase fee applies if a joint purchase is being made?We would still charge on a time cost basis and our fee is expected to be higher to reflect the additional time required in dealing with multiple purchasers and if applicable multiple mortgage arrangements.

We do not insist on BW SIPP LLP being the sole SIPP provider for joint purchases but costs are likely to be higher if we are dealing with a third party SIPP provider as opposed to just Barnett Waddingham SIPP members (potentially in partnership with the members or their companies).

What do you do for your annual property fee?Additional responsibility is placed on us where your Barnett Waddingham SIPP owns property as we will be (one of the) registered owners.

We have to maintain records of the property and the rent being received and so an additional annual fee applies where your Barnett Waddingham SIPP owns property. This fee also covers the cost of processing six cheques each year to cover property expenses.

Additional cheques will be subject to our cheque processing fee.

Property inspections are not included in the property management fee.

What does your annual rental fee cover?This covers the invoicing by us to a single tenant for rent.

There will be additional fees where there is more than one tenant.

If you would prefer to issue the rent invoices yourself then we are happy for you to do this but you must ensure we receive copies otherwise additional fees will accrue.

Why is there a charge for the annual management of a joint bank account?Where a property has more than one owner, even if the additional owners are connected with your Barnett Waddingham SIPP, we charge for the additional work required in dealing with the income and expenditure between the joint owners.

What if the property being purchased is overseas?Our fees for overseas purchase are likely to be considerably higher as we would need to liaise with a solicitor in UK as well as overseas.

What if I want to purchase residential property?A purchase of residential property is not generally permitted under our Trust Deed and Rules as it gives rise to additional tax charges.

Where we are involved in discussing whether a particular property with a residential element can be purchased, our Client Manager will charge a time-cost fee reflecting the time spent.

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The parties involved

BW SIPP LLP acts as Administrator and Operator of the Barnett Waddingham SIPP. The businesses within the Barnett Waddingham group have considerable experience of acting as professional trustee to both Small Self Administered Schemes and SIPPs.

BW SIPP Trustees Limited acts as a bare trustee of the Barnett Waddingham SIPP, holding assets owned within your fund. It is a non trading company wholly owned by Barnett Waddingham LLP set up especially to act as a bare trustee to your Barnett Waddingham SIPP, together with yourself. If you wish you can appoint a third Trustee who is known to you to act on your death.

For more information please see our Barnett Waddingham SIPP Due Diligence Guide.

Solicitor - for property purchase we are happy for you to appoint a solicitor of your choice to act on behalf of your Barnett Waddingham SIPP when buying the property and drawing up the lease for the tenant.

Mortgage Lender - we do not insist on you using a specific lender. We are happy for you to select the lender to provide the finance to your Barnett Waddingham SIPP and to negotiate the terms of the mortgage directly.

The borrowing will be in the name of BWSIPP Trustees Limited. There will always be a restriction on the Land Registry preventing the sale of the property without your consent.

Property Insurer - all properties held by a Barnett Waddingham SIPP must have appropriate insurance in place but you are free to find the most suitable insurance policy.

Property Manager - we do not require you to appoint a property manager but we are happy to confirm any appointments you would like to make and encourage this.

Surveyor - when a property is bought from, or sold, or let, to a person connected with you then an independent valuation of the purchase price or rent is required. We are happy for you to select an appropriate surveyor who is familiar with properties in the area to provide the valuation.

Summary of potential risks

General investment risk Investments in different types of UK commercial property carry their own individual risks. Their value is not guaranteed and can fall as well as rise. You could get back less than invested. It is also important to note that the risks applying to, and hence returns from, commercial property are different from residential property.

Valuation riskThe value of a property is generally a matter of a surveyor’s opinion and not fact and the true market value is only determined once the property is sold.

Concentration of riskIf a significant proportion of your fund is invested in property it is more vulnerable to the market should it suffer a downturn than if you have a wider range of investments.

Illiquidity In certain situations it may be necessary to sell the property to raise cash in order that your Barnett Waddingham SIPP can make the payments required (such as to service a mortgage, to meet ongoing fees or to pay death or retirement benefits).

Such a sale may need to take place at an inopportune time in the property market.

MarketabilityProperty may take longer to sell than some other assets and it may not be possible to sell when desired. The delay could be considerable and depends on market conditions at that time.

This may result in a delay in paying benefits.

VoidsIf all or any part of the property remains or becomes vacant at any time, costs may still be incurred in respect of the property or that part of the property although there will be no rental income in respect of it. These costs and any others normally recoverable from the tenant, will be met from your Barnett Waddingham SIPP.

Legal risksCommercial properties are subject to legislative requirements which, if not adhered to, could result in costs to your Barnett Waddingham SIPP or an adverse effect on income and/or property value.

Disputes and LitigationThe costs incurred in relation to any dispute or litigation which arises in respect of the property investment which cannot be recovered from the tenant will be taken from your Barnett Waddingham SIPPs designated bank account.

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Glossary and explanation of terms

Commonhold - Commonhold is a system of property ownership in England and Wales introduced in 2002 as an alternative to leasehold. It involves the freehold tenure of part of a multi-occupancy building (typically a flat) with shared ownership of and responsibility for common areas and services.

Feuhold - Property in Scotland is generally owned outright by the vendor similar to Freehold in England. Prior to November 2004 property was held as “Feuhold” subject to rights of the feudal superior. These rights were abolished on 28 November 2004 and the term “Feuhold” discontinued. Property owned outright by a vendor can be subject to the terms of a lease and the same checks should be made as for Freehold properties.

Freehold - Freehold property is owned outright by the vendor and is sold with “title” i.e. the right of ownership of the land and/or buildings. Freehold property may have a sitting tenant, or it may be transferred without occupants. If it has a sitting tenant, then the terms of their lease should be checked to ensure the landlord’s rights to transfer to the scheme.

Leasehold - Leasehold property is not owned outright by the vendor. Instead, the freeholder retains the freehold and the benefit of a lease is transferred to the scheme. This lease could be short term but is more likely to be long term (125 years or even 999 years). There may be a rent payable, either a small amount (usually less than £1,000 per annum) or the rent may be “a peppercorn” or some other notional amount. When a long leasehold interest is purchased, a consideration (roughly equal to the market value of the property freehold) will be paid to the vendor. This is sometimes termed the “premium”. Property in Scotland can be held under “Leasehold” subject to a maximum term of 175 years but such holdings are rare in Scotland.

Stamp Duty Land Tax (SDLT) - This is charged on land and property transactions in the UK. The tax is charged at different rates and has different thresholds for different types of property and different values of transaction.

The tax rate and payment threshold can vary according to whether the property is in residential or non-residential use, and whether it is a freehold or leasehold. SDLT relief is available for certain kinds of property or transaction.

Value Added Tax (VAT) - This is a tax that’s charged on most goods and services that VAT-registered businesses provide in the UK. VAT is charged when a VAT-registered business sells to either another business or to a non-business customer.

When VAT-registered businesses buy goods or services they can generally reclaim the VAT they’ve paid.

BW SIPP LLP is a limited liability partnership registered in England & Wales. Registered No. OC322417.

Registered office: Cheapside House, 138 Cheapside, London EC2V 6BW. A list of members of BW SIPP LLP may be inspected at the registered office. BW SIPP LLP is authorised and regulated by the Financial Services Authority.

© Barnett Waddingham – MARCH 2012

www.bwsipp.co.uk

For more information about our SIPP or any of our other services please contact us by email at: [email protected]

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