As you may be aware the government has indicated there will be some relaxation of planning rules and we understand that this may include making it easier to obtain permission to convert some vacant commercial properties to residential.
With this in mind we wanted to contact you to remind you about the very strict HMRC rules surrounding property ownership within your pension scheme, in particular the fact that residential property must not be held within your scheme.
What property can your pension scheme own?
The following lists are not exhaustive but aim to give a brief overview.
You pension can own:
• Freehold/Leasehold commercial land and buildings like offices, shops, factories.
• Land for development.
• Agricultural land.
• Hotels, care homes, halls of residence – subject to certain restrictions.
Your pension cannot own:
• residential property like houses, flats, holiday homes, buy to lets or holiday lets
• any land that is wholly or partly the garden or grounds of a residential property
• Residential Ground rents – which are a type of long leasehold – held in relation to residential property
• Overseas property
If, during the pension scheme’s ownership of a property any type of development is intended, please let us know immediately so that we can discuss proposals with you to ensure no breaches of HMRC rules.
Although your scheme can apply for residential planning please be aware that no form of the residential development can be carried out by a pension scheme and, the property would have to be sold before any residential development was physically commenced.
The property must be legally classed as commercial throughout the pension scheme’s ownership. As such Business Rates should be paid in respect of the property – not Council Tax (which applies only to residential properties).
If you have queries regarding development then please request a copy of our separate Property Development Guide in the first instance.
Consequences of failure to adhere to HMRC rules
If a scheme directly or indirectly acquires or holds taxable property (residential property or tangible moveable property) this will create an unauthorised payment charge on the member personally (or in some cases on the sponsoring employer) whose scheme acquires the asset. The unauthorised payment tax charge is 40% of the amount of the unauthorised payment (i.e. the purchase price/property value).
There is also a scheme sanction charge of 15% and if the investment exceeds 25% of the fund value then an additional tax charge of 15% applies which would take the total tax charges to 70% of the value of the property purchase price/value.
It is these significant tax charges that makes the holding of residential property prohibitive.
Full details of the consequences for failure to adhere to the HMRC rules can be found in the Pensions Tax Manual:
We hope this proves a helpful reminder of the rules, if you have any queries at all please do contact us.