Schemes can also purchase commercial properties with a plan to let them to unconnected parties, although it is important to keep in mind, if there are problems with finding a tenant, significant ongoing expenses are likely to be incurred simply holding the property in the pension.
These will potentially include costs including insurance, rates, agent’s fees and the scheme administrator’s charges.
What is and is not commercial property
HMRC is happy for pension schemes to invest in commercial property, although we will touch on one or two examples where this is not the case a little later.
The permissibility of commercial property means investment in industrial, office and retail premises have long been popular options, although again we touch on some issues later.
Investment in residential property is a different matter with penal tax charges imposed on the member and scheme if it buys a property meeting HMRC’s definition of residential.
Perhaps the more appropriate question to ask is: what is and is not residential property?
The starting point is that a property is residential if it is: “used or suitable for use as a dwelling”.
Also captured are land which is wholly or partly the garden of the property, the grounds of the property if intended to be used for a purpose associated with the enjoyment of the building, and any buildings or structures on that land.
Example of cases likely to cause problems would be the use of a pension to buy a plot of land at the bottom of a garden to protect the view from a house, or a separate garage in which to store cars.
Properties which need careful consideration when it comes to the “commercial or residential” assessment include hotels, pubs and shops with flats above.
Hotels are generally treated as commercial property provided that the whole, or a share of the whole, hotel is purchased. Time-shares and the ‘fractional’ purchase of one or more individual rooms within a hotel are treated differently and will lead to tax charges.
Pubs and shops with flats above are interesting because HMRC allows residential property to be held in cases where the residence is permitted “job-related”. Those requirements are met provided one of two sets of conditions are met.
Either:
- The person occupying the property is not the member or connected to them, is not connected to the employer (being an employee in itself doesn’t create a connection), and is required as a condition of employment to occupy the premises; or
- The person occupying is not the member or connected and the residential element is used in connection with the business premises held in the scheme.
Looking at a pub, provided a live-in landlord is not the member or connected to them, or connected to their employer, and is required to live in the pub, the property should be acceptable from a HMRC perspective.
Shops with flats above are broadly the same, though care is needed in both cases.
Consideration also needs to be given to the likelihood that no employee will occupy the premises in the future.
