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The Truth About Using SSAS Pensions and Buying Residential Investments

May 18, 2017

Advice on SAAS pensions form Optimise Accountants

By Louise Misiewicz

Have you heard that you can use an SSAS pension to invest directly or indirectly to residential property investments?

I’ve heard a lot of my property investor clients that have been approached by companies to use their SSAS pensions to invest in residential properties. As a property tax specialist, I was curious  as I knew that pensions are allowed to invest in commercial properties but not in residential ones.

What is an SSAS pension?

Wikipedia gives a relatively straightforward explanation of what a Small Self Administered Scheme (SSAS) is. It is a type of UK Occupational Pension Scheme.

Schemes are trust-based and established individually, usually by directors of limited companies for specified employees of the company. Since Pension Simplification (also known as A-Day), SSAS has been available for establishment by those who are not in a limited company (i.e. Partnerships and Families).

SSAS registered with HMRC may enjoy tax-exempt status, all investments made will be free of Capital Gains Tax, and contributions to the SSAS will receive tax relief (if contributions are made by a “Relevant UK Individual”).

 

Basic rate tax relief can be claimed by the SSAS itself, and any higher rate tax would be claimed through the member’s tax return. However, it should be noted that the vast majority of SSAS do not reclaim tax on members contributions as this would require the scheme Trustee / Administrator applying for Relief at Source via HMRC.

The sponsoring employer can also pay contributions to the scheme and may obtain tax relief on the contributions, as I wrote about in this previous article.

Provided that the members of the SSAS pension scheme are also trustees, there is a lesser regulatory requirement than if all members were not trustees. This is because the members of the SSAS pension scheme are deemed to be investing the funds for themselves.

The trustees can invest the funds as they consider appropriate to the needs of the SSAS pension scheme. For example, the trustees can invest the assets of the pension scheme in the company that sponsors the SSAS pension scheme – a process known as pension-led funding.

This can take the form of loans to the employer and the purchase of shares in the sponsor, however, there are limits that apply. One must be very careful purchasing shares in the company through an SSAS, ‘Taxable moveable property’ laws can easily be breached. Guidance from the SSAS Practitioner or Administrator is required.

SSAS pensions and residential property investments

HMRC and Section 174A and Paragraph 6 Schedule 29A Finance Act 2004 shows that if an investment-regulated pension scheme directly or indirectly acquires taxable property (residential property or tangible moveable property) this will create an unauthorised payment charge on the member whose arrangement acquires the asset. In addition, the scheme administrator will be liable to a scheme sanction charge on both on income from the taxable assets and capital gains at their disposal.

Direct Residential Property Investments – Tax Charges

HMRC shows that if an investment-regulated pension scheme acquires a direct holding in taxable property this creates an unauthorised payment on the member for the purposes of whose arrangement the property is held. So the member is subject to the unauthorised member payments charged at 40% on the relevant unauthorised payment value. The scheme administrator is liable to the scheme sanction charge, generally an amount of 15% of the value. If certain limits are exceeded the member may also be subject to the unauthorised payments surcharge at 15%. See PTM134000 for further details of all these charges.

Income or deemed income received in relation to the asset is charged to the scheme sanction charge so the scheme administrator is liable to the scheme sanction charge at 40%. See PTM135000 for further details of this charge.

Indirect Residential Property Investments – Tax Charges

As shown in the Section 174A and Paragraphs 16 to 19 Schedule 29A Finance Act 2004 the taxable property provisions apply where an investment-regulated pension scheme holds either a direct or indirect interest in taxable property. PTM121000 explains the position for direct interests and the following paragraphs explain the position for indirect interests.

An indirect interest in taxable property will be held through a “vehicle”, i.e., a person or entity through whom the pension scheme holds the property. So if a pension scheme holds 100% of the share capital of a company which itself owns residential property then the company through which the pension scheme owns the property is the vehicle.

Indirect investment in taxable property via genuinely diverse commercial vehicles will not be subject to the tax charges on taxable property.

A person indirectly holds an interest in a vehicle if the person:

  • holds an interest in a person who holds an interest in the vehicle, or
  • holds an interest in a person who holds the interest in another person who holds the interest in the vehicle and so on down through any length of chain of interests held.

A pension scheme holds 100% of the shares in company A and company A holds 50% of the shares in company B. The pension scheme indirectly holds an interest in company B of 50% (i.e. 100% x 50%).

An indirect interest in taxable property can be held via a wide variety of types and sizes of vehicles or structures including collective investment schemes, unit trust schemes, unauthorised unit trusts, exempt unauthorised unit trusts, open-ended investment companies, closed-ended companies, investment trust companies, insurance policies and contracts, trusts, depository interests, or exchange traded funds.

Only limited indirect investment in taxable property will not be subject to the tax charges on unauthorised payments. This is through genuinely diverse commercial vehicles.

Indirect investments held through genuinely diverse commercial vehicles will not be subject to tax charges when held as a scheme investment by an investment-regulated pension scheme. There are three categories of genuinely diverse commercial vehicle:

1 – UK REITS,

The pension scheme’s interest in the UK REIT must meet the following conditions.

  • must not directly or indirectly hold an interest in the UK REIT for the purposes of enabling a member of the pension scheme or a connected person of a member to occupy or use the property, and
  • must meet either the condition a. or b. below,

a. where the pension scheme is an occupational pension scheme the pension scheme together with any associated persons, must not hold directly or indirectly an interest in the UK REIT that exceeds any one of the limits (see below), or

b. where the pension scheme is not an occupational pension scheme no arrangement under the pension scheme, together with any associated persons, may hold directly or indirectly an interest in the UK REIT that exceeds any one of the limits (see below).

The limits referred to in conditions a. and b. above are:

  • 10% or more of the share capital or issued share capital of the UK REIT,
  • 10% or more of the voting rights in the UK REIT,
  • a right to receive 10% or more of the income of the UK REIT,
  • such an interest in the UK REIT as gives an entitlement to 10% or more of the amounts distributed on a distribution in relation to the UK REIT,
  • such an interest in the UK REIT as gives an entitlement to 10% or more of the assets of the UK REIT on a winding up or in any other circumstances
  • such an interest in the UK REIT as gives rise to income and gains derived from a specific property.

Example – A non-occupational pension scheme arrangement A owns 50% of a UK REIT and arrangement B owns 5% of the same UK REIT and the UK REIT owns a residential property. Arrangement A and arrangement B relate to members who are not the same person and are not connected with each other. Arrangement A will be treated as having an indirect holding in the residential property and as the limit is exceeded the appropriate tax charges will apply – see ‘Tax charges that apply’ below. Arrangement B will not be treated as having an indirect holding in the property.

You can read more about REITs in our article

2 – Other kinds of vehicle

If a vehicle meets certain conditions, where the pension scheme and associates, directly or indirectly own 10% or less and there is no right to have private use of any taxable property they will not be subject to a tax charge. The vehicle must meet three conditions.

Condition 1 – the total value of the assets held directly by the vehicle is at least £1 million, or
the vehicle holds at least three assets directly which are residential property,
and in either of these cases no asset held directly by the vehicle which is taxable property has a value which exceeds 40% of the total value of the assets held directly.

Condition 2 – if the vehicle is a company,

  • it is resident in the United Kingdom and is not a close company (therefore the company must be listed on the stock exchange), or
  • it is not resident in the United Kingdom and would not be a close company if it were resident in the United Kingdom

Condition 3 – The vehicle does not have as its main purpose, or one of its main purposes, the direct or indirect holding of an animal(s) used for sporting purposes. This is to recognise that many racehorse syndicates have many members and provide them with certain benefits related to the horse ownership such as attendance at race meetings as an owner with access to the owner’s enclosure.

The scheme must not directly or indirectly hold an interest in the vehicle for the purposes of enabling a member of the pension scheme or a connected person of a member to occupy or use the property, and
must meet either condition a. or b. below:

Condition a – Where the pension scheme is an occupational pension scheme the pension scheme, together with any associated persons, must not hold directly or indirectly an interest in the vehicle that exceeds any one of the limits in the paragraph below.

Condition b – Where the pension scheme is not an occupational pension scheme no arrangement under the pension scheme together with any associated persons, may hold directly or indirectly an interest in the vehicle that exceeds any one of the limits in the paragraph below.

The limits referred to in conditions a. and b. above are:

  • 10% or more of the share capital or issued share capital of the vehicle,
  • 10% or more of the voting rights in the vehicle,
  • a right to receive 10% or more of the income of the vehicle,
  • such an interest in the vehicle as gives an entitlement to 10% or more of the amounts distributed on a distribution in relation to the vehicle,
  • such an interest in the vehicle as gives an entitlement to 10% or more of the assets of the vehicle on a winding up or in any other circumstances such an interest in the vehicle as gives rise to income and gains derived from a specific property.

These limits apply to indirect holdings of a vehicle as well. So if a pension scheme holds 50% of company A which in turn owns 15% of company B then the pension schemes interest in company B will be 7.5%. The indirect holding in company B will be less than 10%.

Example – A non-occupational pension scheme arrangement A owns 50% of a company and arrangement B owns 5% of the same company and the company owns a residential property. Arrangement A and arrangement B relate to members who are not the same person and are not connected with each other. Arrangement A will be treated as having an indirect holding in the residential property and as the limit is exceeded the appropriate tax charges will apply, see ‘Tax charges that apply’ below. Arrangement B will not be treated as having an indirect holding in the property.

3 – Trading concerns

These are vehicles that are arm’s length trading vehicles. There are four conditions to be met:

  • the vehicles main activity is the carrying on of a trade, profession or vocation
  • the pension scheme either alone or together with associated persons does not have control of the vehicle
  • neither a pension scheme member nor a person connected to such a member is a controlling director of the vehicle or any other vehicle which holds an interest in the vehicle directly or indirectly
  • the pension scheme does not directly or indirectly hold an interest in the vehicle for the purposes of enabling a pension scheme member or a connected person of such a member to occupy or use the property.

“Control” has the meaning given by section 450 Corporation Tax Act 2010. Read references in that section to a company as references to the vehicle and associates as including associated persons. “Controlling director” means a director to whom sections 452 (1) and (2) Corporation Tax Act 2010 apply broadly to 20% controlling directors. In that section read the reference to associates as including associated persons.

This enables pension schemes to invest commercially in trading concerns without worrying about tangible moveable property that is being used by the company for its trade.

In summary 

So the question is whether this convoluted sequence of transactions whereby the scheme lends money to the sponsoring employer who then lends it to another company that invests in residential property would be deemed to be an ‘indirect’ acquisition of residential property.

Lending money to the sponsoring employer who then lends it to another company would not fall foul of HMRC’s lending rules. The fact that the only purpose for doing so would seem to be to release money from a pension scheme to purchase residential property unquestionably makes it sharp practice.

The General Anti-Abuse Rule (GAAR) introduced in part 5 and Schedule 43 of the Finance Act 2013. Section 207(2) of Finance Act 2013 says that the Tax arrangements are “abusive” if they are arrangements the entering into or carrying out of which cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions having regard to all the circumstances, including:

  • (a) whether the substantive results of the arrangements are consistent with any principles on which those provisions are based … and the policy objectives of those provisions;
  • (b) whether the means of achieving those results involves one or more contrived or abnormal steps; and
  • (c) whether the arrangements are intended to exploit any shortcomings in those provisions.

It would be hard to argue that establishing a loan with the employer so that it could lend money to another company could be construed as anything other than a ‘contrived or abnormal’ step as there is no reason why the SSAS could not lend directly to the third party. Therefore, we consider this to be a high-risk strategy that needs to be handled with extreme care.

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If you want to understand how to implement this strategy or to discuss other finance/tax questions then please book some time with us using the below calendar.

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Email: simon@optimiseaccountants.co.uk