Disputes regarding SIPPs investing in Commercial Property

Tuesday 13th November 2018

Self-Invested Personal Pension Schemes (“SIPPs”) were introduced by the Finance Act 1989 and have become an increasingly popular vehicle for those seeking greater freedom in determining how their pensions are invested.

A growing number of investors are using a SIPP to invest in commercial property, aimed at providing a regular tax-free income with strong potential for capital growth.  While a primary attraction of investing in a SIPP is the flexibility it provides, the rules about what you can and cannot do are complex.

Investors can use SIPPS to invest in various classes of assets including freehold or leasehold commercial land and buildings such as offices, shops, factories, public houses and agricultural land.  Permitted investments can also include hotels, care homes and student halls of residence, subject to certain restrictions.   Commercial property is usually let on a “full repairing and insuring” basis, making such arrangements attractive to investors who do not want to assume day-to-day responsibility for the property.

Essentially, only property which is commercial in nature can be invested in a SIPP. Residential property is classed as ”taxable property”, attracting an onerous tax charge.  However, where a commercial property also has a residential element, for example a shop with a flat above, the whole property may be held by the SIPP and avoid those tax implications if it is an integral part of the property and is occupied by an unconnected party. 

The owner of a business occupying property may benefit by using a SIPP to buy that property.  If the business previously owned the property, transferring ownership to a SIPP would provide an instant cash injection for the business and all future rents would be paid into the SIPP tax-free.  Any increase in the value of the property whilst within the SIPP will also be free from capital gains tax.  There is no limit on the proportion of a SIPP that can be invested into a property, and a SIPP is also able to borrow up to 50% of its net value, the rental income often being used to cover the SIPP trustee’s borrowing repayments.

Investors should note, however, that property acquired by a SIPP must be bought for a fair market value, rents must be set at market rates and rent arrears must be pursued.  For example, where an investor invests in a property through his or her SIPP and operates their business from that property, the SIPP cannot let the property to his business for a reduced rent.  All transactions must take place on a commercial arms-length basis.

The legal owner of property purchased through a SIPP is the trustee of the SIPP rather than the member investor, despite the fact that the investor’s money has funded the purchase via the SIPP.  This subtle, but important, point means that responsibility for property held by a SIPP lies with the trustee, which can lead to disputes between trustees and members, for example where the member undertakes works on the property without consulting the trustee.

Gordons has a wealth of experience in acting for corporate trustees of SIPPs and has a clear understanding of the legal and regulatory framework under which SIPPs operate.  Our lawyers can help to resolve:

  1. Disputes with occupiers/tenants of commercial property owned by SIPP trustees, for example in respect of the recovery of rent arrears, lease renewals, forfeiture and dilapidations, and;
  2. Disputes with and between SIPP members, for example with respect to alleged breach of trust, negligence and contractual claims.

If you would like to discuss how we can help you with SIPP related disputes please contact Andrew Breckenridge.