Over the past 6 years I have specialised in and undertaken many SIPP & SSAS pension scheme property transactions, be them buying, selling, leasing or general property management matters.
This article contains some of the questions I am most regularly asked by the ‘beneficiaries’ or ‘members’ of such pension schemes in respect of the properties their pension scheme owns or is in the process of acquiring. The answers given are general guidance, as opposed to specific advice. I always, and still do, encourage the parties with such questions to seek the expert advice they require from their relevant tax, financial or trustee adviser – these are the parties I work with regularly and their advice on such topics should always be sought where questions arise.
Question 1: It is my property, isn’t it?
Yes, and no.
It is not your property as perhaps a property that is owned in your name and outside of the pension scheme would be.
However, it is held by the pension scheme trustees with all the advantages associated with it being in the trustees’ name for the benefit of the ‘beneficiaries’ or ‘member’s’ of the pension scheme.
This means that you cannot do as you wish with the property and it is for the pension scheme trustees to administer, care for and protect – no doubt with considerable input from you. The pension scheme trustees provide a regulated service, meaning that they have strict rules and guidelines that they must operate subject to. This is done by the trustees whilst also ensuring that they are operating in the best overall interests of the pension scheme, the assets within it and the parties who benefit from it.
Question 2: Why does the pension scheme need to go to the expense and effort of putting a lease in place? I am, own or know the tenant and we have come to a spoken understanding…
Firstly, this is important and applies regardless of whether you own a property yourself, through a company or in a pension scheme. Should you grant a party, other than that named on the title as the owner, permission to enter/occupy/store then you need to have a properly drafted lease, licence or tenancy in place to ensure that the third party pays you what you are due, treats the property as you would expect and does not acquire any rights in respect of the property that erodes its value or devalues your title to it.
Secondly, from a pension scheme trustee perspective they would not be undertaking their duties to protect the pension assets and ensure that they generate income for the pension should occupation be allowed without it being properly documented. Furthermore, they could risk acquiring liabilities to the occupier that would conflict with their duties to other pension schemes they administer due to the limitation of liability clause not being included in such a relationship. I shall come to the reasons for a limitation of trustee liability clause later on in this article.
Thirdly, when the property generates rental income for the pension scheme it is owned by the trustee must be able to show a legal entitlement to the income generated and a lease provides this.
Question 3: I want to buy a residential property with my pension scheme funds, will that be a problem?
In a word ‘yes’.
The basic position is that pension schemes are legally allowed to purchase residential property but subject to massive tax liabilities that are so large that it is not economic to do so – meaning many trustees simply do not permit it as a rule.
The reasoning for this being to seek to control demand for residential properties as a whole, without introducing the economic pressure of many pension schemes entering the residential property market thereby increasing prices further. There are specific and narrow exceptions to pensions schemes being able to have interests in residential property and I do not intend to cover them in this article.
Question 4: Can I borrow money to fund the purchase of a property by my pension scheme?
This is a permitted route to part funding the acquisition of a property with your pension scheme that is regularly undertaken. As always there are rules in respect of borrowing, such as the general valuation and affordability requirements that all borrowers must satisfy. There are also pension scheme specific rules, such as a limit on the level of debt the pension fund can take on in relation to the value of the cash and/or the unencumbered assets the pension scheme owns.
Question 5: Why do all the documents relating to the pension scheme’s ownership and dealings with the property include a ‘limitation of liability’ clause?
This is a good question. The first thing to clarify is that it is not the trustee trying to limit their liability to you as the beneficiary in respect of the unlikely event they negligently act in a way that causes the pension scheme to suffer a loss. Like any credible professional or financial services provider they will have insurance in place for such, rare, instances.
The limitation of liability clause addresses the relationship with third parties to the pension scheme such as buyers, sellers and tenants. It limits the trustees liability to these third parties to the value of the pension scheme that the property is owned by. The reason for this being that the trustee will be administering many different pension schemes for their respective beneficiaries and should a successful claim be made by a third party against a specific pension scheme then the pension schemes of the many other unrelated individuals will be ringfenced against the liabilities arising from that third party claim. This is vital to keep each beneficiary’s pension scheme safe from claims against other pension schemes administered by the same trustee and is a requirement trustees strictly enforce.
Ashfords LLP has a dedicated SIPP and SSAS team specialising in property and corporate transactions, disputes, tax advice and estate planning aspects of such pension schemes and we would be delighted to assist you, as either a beneficiary or a trustee.