Holding mixed use property in a SIPP or SSAS

One of the most common questions put to our property team is whether a pension scheme can buy a mixed use property, which has both commercial and residential elements.

In this article, we explore what a mixed use property is, the potential issues which may arise and the need to structure the transaction in the right way. We also touch on what would happen if the customer wished to convert it to either fully commercial or fully residential.

What is a mixed use property?

This is simply a property which consists of a commercial element and a residential element.

They are typically found on High Streets across the country, where the ground floor is perhaps a shop with a flat or self-contained accommodation above.

Other examples include public houses (with manager’s accommodation) or farmland (with accommodation for the farmer).

They often come to the market for sale as one property or held on one property title, which is why we are asked whether we can acquire them in a SIPP/SSAS.

Can it be held in a SIPP or SSAS?

To assess this, we would need to know the title structure (freehold or leasehold), and whether it is a single interconnected unit or separate units. We would also need to know who would be living in the residential element, and whether one of the job-related exemptions would apply.

Where the residential element is to be excluded, it would be necessary to split the title in the right way, to meet the requirements of the pension scheme trustees – see later.

A single unit

In some cases, the property will be a single self-contained unit, with the person living upstairs in connection with the business below. A common example is a public house, where the person is required to live in the pub, often as they are expected to be on-site for extended periods such as to accept deliveries which can happen at any hour, not just when the pub is open to customers. The person living there can move between the commercial and residential elements without having to leave the building. Depending on who lives there, the entire property may be acquired by the pension scheme – see our article last month which covered this in more detail.

Separate units

In cases where the residential element is separate from the commercial element, with its own separate access, the residential element could only be acquired if it met the requirements of one of the job-related exemptions previously mentioned.

If the job-related exemptions did not apply, the pension scheme would typically only be able to buy the commercial element. If both elements are held on one title, it would be necessary to split the title.

Splitting the title

Where the pension scheme is buying only the commercial element, it will be necessary to split the title in the right way.

The most common way of proceeding with this is that the property is split by the vendor (who could be the freeholder or another leaseholder) creating or selling a long leasehold interest (50 years +) in the commercial element of the property to the pension scheme. If a connected party transaction, then this must be done at the market value.

In this instance, the pension scheme can only acquire the commercial element of the property. It cannot buy the whole property and then subsequently sell off a long leasehold of the residential part. This due to the fact the scheme still would have ownership of residential property.

The other (and less common) way is that pre purchase the vendor splits and registers a new freehold title. Effectively leading to the property having 2 legal freehold titles. One commercial and one residential. The vendor can then freely sell the commercial freehold title to the pension scheme.

Beware that some solicitors may not be aware of this, and the vendor must be willing to structure the arrangement accordingly.

Can the residential element be converted to commercial use?

Sometimes the residential element may be empty, and the commercial tenant may wish to use the upstairs for their commercial use, such as storage of stock or equipment.

In these circumstances, the pension scheme could not acquire the residential element until the completion of each of the following steps:

1 Gain local authority planning consent to convert the residential element to commercial use.

2 Make the changes required to the property, for that commercial use.

3 It must then have been used commercially before the pension scheme acquires it.

Can the commercial element be converted to residential use?

Although the regulations would allow some conversion to be started, but not completed, this is not something we would allow as it exposes the trustees to potential issues surrounding funding, limited appeal of a partly completed building and the chance that HMRC may deem the transaction trading, which would attract tax.

In some cases, it may be possible for the pension scheme to meet the initial costs of applying for conversion to residential use, but we would not agree to any further costs or works commencing, meaning that the pension scheme would need to sell at that stage.

Discussing potential investments

Our commercial property team has a lot of expertise and experience, having been involved in over 3,000 acquisitions of commercial property and land.

We are happy to chat through a potential scenario and can usually give you a quick steer on whether something is likely to be acceptable.

Please contact us if you would like to discuss a potential investment.

Note that the information in this article is based on InvestAcc’s understanding of current law and HMRC practice, which is subject to future change.

June 29th, 2022