Do you know your SIPP from your SSAS?

Joint investment in property via pension schemes – some issues to consider

In the current economic climate, certain types of pension scheme have become attractive and tax efficient tools to save and invest in commercial property.

However, the structure of these small self-administered and self-invested pension schemes (or SSASs and SIPPs as they’re commonly known), can have consequences, sometimes unintended, for investors.

We now look at some issues investors need to be aware of in relation to these schemes (including how to get your money back out of them).

What’s the difference between a SSAS and a SIPP?

Both of these investments attract no income tax or capital gains tax, and investors benefit from tax relief on contributions. However, depending on the structure of the scheme, investors may be put into positions of responsibility as trustees (and landlords) of their investment properties, which gives rise to certain consequences.

Title to a SSAS property will be held in the name of the scheme members, each in their capacity as trustee for the pension scheme. There is no mechanism for splitting the ownership further amongst the trustees according to their relative contributions into the scheme, but the members often rely on the scheme’s trust deeds to apportion outlays, incomes and liabilities arising in connection with the property.

In contrast, title to a SIPP property will generally be held in the sole name of the scheme provider in its capacity as trustee, with the investors usually being the beneficial owners only (although they may also jointly hold the title as co-trustees).

Managing the investment

As active investments, scheme properties will require some level of ongoing management.  Landlord approval may be sought on a variety of points such as change of use, alienation and tenant alterations, and the landlord will be involved in negotiating rent reviews or instructing inspections or marketing.

In the case of a SSAS with multiple investors, such decisions will need to be taken collectively. In the case of a SIPP with more than one member, the members will need to act in a collegiate fashion in instructing the SIPP provider in taking investment decisions.

Trustees/members will also need to agree on a long-term strategy for the ongoing management of the property, to protect their long-term investment.  A document setting out the basis on which such decisions are made by the members, and what to do in the event of disagreement, is imperative.

Getting your money back out

Naturally, there may come a time when one or more of the members will want to withdraw from the scheme (a particular concern where the members are of different ages).  With funds tied up in bricks and mortar this is easier said than done, and a well-planned exit strategy is crucial.

If the only way to recover the investment funds from the scheme is to sell the property to a third party, a turbulent property market may cause difficulties and disagreements where not all members are under pressure to release their capital.

In the case of a SSAS, it would be the absolute right of any one of the members to raise an action for division and sale of the property to secure return of their investment, so all trustees have an interest in giving this proper consideration. In the case of a SIPP, the SIPP provider will likely require the members to enter into an all-party agreement, governing how exit decisions are taken.

Get in touch

If you would like to speak to Harper Macleod in relation to SSASs and SIPPs, or any other matter, we would be delighted to help.

• John Meehan   |   0141 227 9622