Buying a property in a SIPP or SSAS
Andrew Needham explains that a SIPP or SSAS that purchases property can register for VAT and recover the VAT on related costs.
It is common practise for pension funds, in the form of a self-invested personal pension (SIPP) or small self-administered scheme (SSAS), to purchase commercial properties and rent them out using the rental income to finance the pension fund with the building held as an asset of the fund.
Registering for VAT
A commonly asked question in these circumstances is: ‘can the pension fund register for VAT?’ The simple answer is ‘yes’. A pension fund is treated in the same way as any other type of legal entity undertaking a business activity for VAT purposes and can register for VAT, reclaim input tax and submit VAT returns in just the same way as a normal business.
The first and most common reason to register is when a scheme purchases a property where the vendor has opted to tax. In these circumstances, VAT would normally be paid on the purchase price, and if the scheme has registered for VAT and opted to tax the building, the VAT charged by the vendor could be reclaimed from HMRC and returned to the scheme.
The second reason for registering would be if substantial development work was to be carried out either on a property being purchased or a property already held within by a pension scheme which had not previously been opted to tax. The contractors will charge the pension fund VAT on the construction work, so the only way to recover this would be to register for VAT and opt to tax the property.
Once the pension fund has registered for VAT and opted to tax a property, it must charge VAT on all future rental income and any subsequent sale.
The downside to this is that any tenant that can’t recover its VAT because it is not VAT registered or only makes exempt supplies will suffer a 20% increase in effective rental payments, and so would be less commercially attractive. However, if the tenant is VAT registered it should be able to recover the VAT charged on the rents and opting to tax should not cause a problem for them.
It is also common for a pension fund to purchase the trading premises of the beneficiary’s business. This has the advantage of separating the valuable property asset from the trading company, so if the company gets into financial difficulties the property is protected in the event of an insolvency.
If the trading company occupies property in, for example, London as a tenant and the landlord has opted to tax it will be charged VAT on its rents. If the building comes up for sale and they decide to purchase it through their pension fund, providing the pension fund is registered for VAT and has opted to tax the property at the time of the sale it can be treated as a ‘transfer of a going concern’ (TOGC) and no VAT is chargeable on the sale.
This is a cashflow advantage to the pension fund as it does not have to finance the VAT charge and there will be an absolute saving in the stamp duty land tax as it is calculated on top of the VAT charged. Remember that VAT has to continue to be charged on the rents to the trading company.
TOGC status will also apply to any properties purchased by the pension fund where there is an existing tenant and the fund has opted to tax on or before the date of the transfer.
Property owning pension funds can register for VAT and reclaim the VAT on the purchase and refurbishment of its properties, providing VAT savings that can be reinvested into the fund.