Pension Schemes and Property
For Use By Financial Advisors Only
This note is for general guidance only and is based on our understanding of the current position of the rules relating to property transactions. Specific advice should be sought in respect of each individual case to ensure that the requirements of HMRC and relevant legislation are being met.
Purchasing Pension Scheme Property & Ownership
In addition to standard property purchases, pension schemes can also consider joining together with other parties to make joint property acquisitions. This approach can be advantageous when the affordability of a particular property is beyond the scope of a single pension scheme and its potential borrowing capacity.
By entering into a joint purchase, two or more pension schemes can combine their resources to afford a higher value property that would not be feasible for them individually. The joint purchase option is also useful when the ideal investment property has been identified but the price remains slightly prohibitive for one scheme to purchase solo.
Joint Ownership Structure
For joint property purchases, the ownership share attributable to each party is determined by their respective contribution to the overall acquisition cost. For example, if Pension Scheme A contributes 60% of the purchase price and Pension Scheme B contributes the remaining 40%, they would each hold that same percentage share of the legal ownership.
This proportional ownership split will then dictate other aspects related to the property. The rental income generated will be divided between the joint owners based on their ownership share. Any ongoing property expenses like maintenance and management fees will also be apportioned according to each party’s ownership percentage.
If the property is sold in the future, the sale proceeds will be split proportionately after transaction costs. Each party’s return on investment will mirror their original ownership share.
A Scheme can borrow up to 50% of its net assets to assist in purchasing property. This is normally through a Bank or Building Society, although it is possible for the Scheme to obtain borrowing from other parties, including connected parties, provided the loan is commercial. Scheme Trustees will usually look to ensure that any liability created by entering into the borrowing arrangement is limited to the assets held by the Scheme.
Connected Party Transactions
It is possible for the Scheme to transact with a connected party (the member, their family or company, for example), provided that this is conducted at market value. If the transaction (either a purchase, sale or letting) is not conducted at market value, a tax charge can be imposed on the pension scheme.
As well as a ‘traditional’ sale or purchase, a Scheme can also consider joint transactions, where the property is purchased in conjunction with other schemes or parties. This is useful where the affordability of the property is limited by the value of a single Scheme and its potential borrowing. Where groups of individuals join together to purchase property, the share attributable to each party is determined by the amount of their contribution to the investment. Additionally, all costs associated with the property will be borne in this manner.
A partnership agreement should be put in
place to cover all of the various interactions between the members of the group, such as income
and expenditure, how the property might be sold, and what happens in the event of the death of
any of the participants involved.