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Residential property in a SIPP or SSAS?

One of the most common questions we are asked is whether you can hold residential property in a SIPP or SSAS? The answer may surprise you, as although the rule is generally that property or land must be commercial, there are some instances where a residential element could be permitted.

Remember the tax reliefs and incentives available to pension schemes cannot be abused to allow any personal benefit to the individual. We set out below examples of property which could be allowable.

In all cases, the customer, or anyone connected to them, cannot live (or have the option to live) in any residential element.

Is there a residential element?

HMRC’s own guidance confirms that certain buildings that would otherwise be within the definition of residential property are not to be treated as residential. A building used for any of the following purposes is not residential property:

– a home or other institution providing residential accommodation for children. This means a dedicated children’s home not simply any home that children can live in, for example, a family’s house,

– a hall of residence for students. This does not include normal houses or flats let to, for example, university students. HMRC provides a lot of detail on its expectations here.

– 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,

– a prison or similar establishment,

– any building specified in Regulations as not to be treated as residential property.

If a building is not currently in use, then you must look back at the last time it was used. 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 their suitability for use as a dwelling.

Commercial property with a residential element – job related exemptions

Here, there are two types of exemption specifically set out in the legislation.

Note that in both scenarios 1 and 2 below, we would only allow acquisition of the property if the associated commercial property was also acquired by the pension scheme:

Scenario 1

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

– is neither a member of the pension scheme 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. We always require a copy of the contract of employment in order to assess a potential acquisition of a property which relies on this exemption.

Scenario 2

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

– occupied by a person who is neither a member of the pension scheme 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 flat above a shop that is leased from the scheme with the shop, where the flat is occupied by the trader in connection with them operating their trade from the shop.

Hotels or similar accommodation

A pension scheme may own a hotel, or part of a hotel. Provided the property meets the definition of a hotel, this can be acceptable as they are commercial property.

However, you cannot invest in Bed and Breakfast Accommodation or Holiday Lets, as both are treated as residential property in which the customer or someone connected to them could live. Also, note that we do not allow hotel room investments.

Genuinely diverse commercial vehicles

In some cases, a pension scheme may invest in something which in turn invests in residential properties.

These may be acceptable where they meet the definition of a genuinely diverse commercial vehicle such as a Real Estate Investment Trust (REITs) or listed shares in a housebuilder which owns potentially thousands of residential properties. Note that we have our own requirements, so would only allow shares which are listed on a major exchange.

You can read more about indirect investments in taxable property (including residential property) here.

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 currently law and HMRC practice, which is subject to future change.

May 30th, 2022