Are there any signs that the ban on holding residential property in a SIPP may be relaxed? There will be an awful lot of vacant/non income-producing properties currently held in SIPPs within the bar/restaurant/hospitality/retail sector as a result of the current crisis which would be very suitable for conversion to residential use.

Neil McAndrews    

Gareth James, AJ Bell’s Head of Technical replies:

The possibility of directly holding residential property in SIPPs was, for many, one of the most exciting potential outcomes of the simplification of pension rules which took effect from April 2006.

Unfortunately for those who were looking forward to this process, the Government U-turned on the idea just a few months before the new rules were due to go live, fearing that billions of pounds of tax relief would be spent sheltering second homes in pension schemes.

SIPPs can directly hold commercial properties such as offices, shops or industrial units, but residential property is effectively banned because holding it is subject to penal tax charges of up to 70% of the value of the property.

There are a few wrinkles in the rules which allow specific types of residential property to be held. For example, a SIPP is allowed to hold a residential flat above a shop if it is being used in connection with the business premises which are also held by the scheme.

Another current wrinkle is that SIPPs can hold commercial property with a view to converting it to residential property. However the SIPP must sell the property before it is used, or suitable for use, as a residential dwelling to avoid the penal tax charges.

All of these wrinkles are tightly controlled by HMRC, and challenging to administer, so many SIPP firms prefer to steer clear of property containing any residential element.

Since 2006 calls have been made to relax the restrictions on residential property, most notably during the 2008 economic crisis. It was suggested the money locked up in pensions could be used to reignite the faltering residential property market.

Similar calls are to be expected once we’re through the worst of the pandemic-related problems, but I’d still be surprised if the Government listened given its prior concerns.

Perhaps more likely is the prospect of fund managers designing investment funds to buy vacant properties with a view to converting them into residential property. The funds could be offered to retail investors, including those with SIPPs.

Provided the funds were structured correctly they could be offered to SIPP investors, as well as to other retail investors, as the investments held within them would be considered sufficiently diverse to meet HMRC’s requirements.

(Tom Selby returns next week).

DO YOU HAVE A QUESTION ON RETIREMENT ISSUES?

Send an email to editorial@sharesmagazine.co.uk with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares.

Please note, we only provide guidance and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

‹ Previous2020-05-07Next ›