Potential for a property planning headache
Proposals to ease planning restrictions, where change of use is being considered, could cause some headaches for pension scheme administrators, as well as investors…
From September it’s likely that a wider range of commercial properties will be allowed to convert to residential use, without the need for planning permission.
Despite these Government proposals, it is still the case that holding residential property in a pension scheme, such as a SIPP, could lead in most cases to unauthorised payment charges being levied on the member and the scheme administrator.
It may be an extreme example, but let’s say an investor holds a vacant commercial property within their pension. Under the current regulations, if the investor wanted to convert the property to residential use doing so would require planning permission, which by necessity would involve the scheme provider as the legal owner of the property. Under the proposed rules’ relaxation, the conversion to flats, for example, could potentially be done, particularly in a SSAS, without the scheme administrator’s knowledge, and then they, and the investor, would be subject to a hefty tax charge. With respect to SSASs, there are still schemes where there is no professional scheme administrator in place, meaning there’s an even greater risk of this happening – advisers could help here by ensuring professional scheme administrators are appointed.
While legislation doesn’t explicitly exclude the holding of residential property within an investment regulated pension scheme, it is taxable so the possible tax charges, as well as the administrator’s capacity to ‘police’ such properties, makes residential property an unacceptable asset for the majority of SIPP and SSAS providers. This means any property likely to become suitable for use as a dwelling would have to be disposed of – either bought out by the members for value or sold on the open market.
There are many elements to consider, so as ever, having an adviser should help mitigate any such issues. A key takeaway here is that investors should always remember to talk to the scheme administrator about significant changes they are considering to a commercial property.
It will probably come as no surprise that we have seen unfortunate outcomes in the past, where investors have altered properties without informing us as the scheme administrator. Part of our role as scheme administrator/trustee is to ensure that the commercial property in the schemes we administer is compliant with HMRC requirements and that we facilitate the object of adding value for the benefit of the investor. If, as a result of this much publicised planning rule relaxation, an investor unintentionally makes their property taxable, it would not naturally fit with that remit.
Another part of our role is to help inform, so we’re taking the necessary steps to ensure that our investors are alerted to the risks and have guidance on this upcoming relaxation of the rules.
This commentary originally featured on FTadviser