Purchasing commercial property at auction through a pension scheme
Although technically permissible, Yorsipp does not permit commercial properties to be purchased directly at auction by a pension scheme. This is because the legal, valuation and due diligence requirements needed to satisfy the trustees cannot normally be completed before contracts are exchanged at auction.
However, a member may choose to bid and exchange contracts in their personal capacity, with the intention of assigning the purchase to the pension scheme trustees before completion, subject to trustee approval and all pension scheme requirements being met.
Where a member purchases a property at auction in their own name, it may be possible for the transaction to complete in the name of the pension scheme trustees, provided all necessary checks can be completed within the required timescales. This includes legal due diligence, a satisfactory Report on Title, an independent valuation and confirmation that the property is an acceptable pension scheme investment.
This approach carries significant risk and should be considered carefully. There is no guarantee that the pension scheme trustees will approve the acquisition and, if they do not, the member may remain personally liable under the auction contract, including forfeiture of any deposit paid and responsibility for completing the purchase themselves.
Key considerations
Before entering into a contract at auction, the purchaser should:
Confirm with both the auction house and the seller that the buyer's name can be changed from the individual purchaser to the pension scheme between exchange and completion.
Check whether any deposit paid personally can be reimbursed if the pension scheme subsequently completes the purchase (this must be agreed by the trustees in advance).
Establish whether VAT is payable on the purchase price, or whether the transaction qualifies as a Transfer of a Going Concern (TOGC).
Where VAT applies, or a TOGC is intended, the pension scheme may need to:
Register for VAT (note – as Yorsipp is already VAT registered and properties are generally purchased in its name, individual pension schemes do not currently need to register separately, unless a property is jointly owned with a third party).
Opt to Tax the property.
Both processes are subject to HMRC timescales and can take several weeks to complete. Sellers' solicitors may require these arrangements to be in place before completion.
Important risks
Even where an individual successfully exchanges contracts, there is no guarantee that the pension scheme will ultimately be able to complete the purchase.
The trustees must be satisfied that:
The property is an acceptable pension scheme investment.
All due diligence requirements have been met.
A satisfactory valuation has been obtained.
The solicitor's Report on Title does not identify any material concerns.
If any of these requirements are not met, the trustees may decline to proceed with the purchase. In these circumstances, the individual purchaser could lose their deposit and may remain personally liable to complete the purchase under the auction contract. Any costs incurred in connection with the proposed purchase, including professional fees and valuation costs, will remain the responsibility of the SIPP member, even if the purchase does not proceed.
It is important to note that if the RICS valuation is lower than the winning auction bid, the SIPP can only pay up to the property's independently assessed market value when acquiring the member's purchase contract. Any shortfall between the winning bid and the amount the SIPP can pay would need to be met by the member personally. Alternatively, the SIPP trustees may decide not to proceed with the acquisition.
Purchasing personally and selling to the pension scheme
As an alternative, an individual may purchase the property personally and subsequently sell it to their pension scheme.
Where this occurs:
The transaction must take place at open market value.
The market value must be determined by a RICS-qualified surveyor.
The property must still meet the pension scheme's investment and due diligence requirements.
The SIPP must have sufficient cleared funds available to complete the purchase by the required completion date. If funds are not available in time, the purchase cannot proceed.
Clients should be aware that this approach generally involves additional legal work and is likely to result in higher costs, including potentially further liability for:
Stamp Duty Land Tax (England and Northern Ireland),
Land and Buildings Transaction Tax (Scotland), or
Land Transaction Tax (Wales).
Summary
Purchasing commercial property at auction with the intention of transferring ownership to a pension scheme can sometimes be achieved, but it carries substantial financial and legal risks. Clients should obtain specialist legal, tax and pension advice before bidding and should not assume that the pension scheme will be able to complete the purchase until all trustee requirements have been satisfied.
To find out more about how this can be put into practice, read our case study here.
