DAVY Private Clients UK

028 9031 0655

Property in SIPP or SSAS and the death benefit trap

SIPP & SSAS are often set up by businesses to purchase and own their commercial premises i.e. offices, factory etc. and the benefits of having a property in a pension include:

  • Tax relief on contributions aids the funding of the property purchase,
  • Rental income is paid to the pension fund, free of tax
  • The rent is tax deductable as a business expense
  • On disposal of the property, the sale proceeds are not subject to capital gains tax

However, a pension fund is ultimately a vehicle for providing income in retirement and it is important that there is sufficient liquidity in the scheme to provide benefits in retirement. In addition, the pension rules governing the distribution of assets on death in retirement mean that it is important that businesses plan for how the property is treated in the event of death.

Pension Rules on the Death of a Member

If a member dies and they have undrawn benefits (uncrystallised), the members fund can pass on, free of inheritance tax, whatever assets are held.

However, if the member dies and is in drawdown (has taken their Pension Commencement Lump Sum or received pension income) or is aged 75 + their fund would potentially suffer a tax charge of 55%, if there is no financial dependant to whom a dependant’s income could be paid.

In simple terms, on a fund of £800,000, a tax charge of 55% is levied against the pension fund, in this case a charge of £440,000.

Therefore it is important to plan ahead to avoid liquidity issues for the pension fund leading to a forced sale.

Planning for the future is the key

Available options include:

  1. Selling all or part of the property back to the business
  2. Purchasing the property from the pension fund using personal assets
  3. Set up a SSAS and introduce other family members into the scheme and re-distribute assets.

If you have clients with Self Invested pension arrangements containing property, it is important to plan ahead for long term benefit extraction and pfc is happy to advise in this area.

Paul Taggart
028 9078 3030