Holding land in SIPPs or SSASs – is this still a smart investment?

A Self-Invested Personal Pension (SIPP) and a Small Self-Administered Scheme (SSAS) are types of registered pension scheme which you or, in the case of a SSAS, your employer, can set up. They are often used by self-employed people and business owners and give more flexibility than other pension schemes, as they have fewer investment restrictions.

SIPPs and SSASs are often used to hold real property i.e. land and buildings (other than direct or indirect holdings in residential property which would fall foul of the taxable property restrictions), and acquire such property directly, via its trustees. To benefit from the tax advantages available to pension schemes, a SIPP or SSAS must be registered with HMRC.

What are the benefits of holding real property in a SIPP/SSAS?

• Tax-free growth: Any increase in the property’s value is exempt from capital gains tax, even when the property is sold
• Income generation: Rental income earned from the property within the SIPP/SSAS can contribute to your pension income
• Tax relief: Contributions to the SIPP/SSAS benefit from pension tax relief at20% for basic-rate taxpayers and up to 40% for higher-rate taxpayers
• Long-term capital appreciation: Property can be a strong long-term investment, especially in low-inflation or low-interest environments, often seen as a “safe bet” for building wealth
• Borrowing abilities: A SIPP/SSAS can borrow an amount up to the equivalent of 50% of the net value of its fund immediately before the borrowing takes place to, for example, purchase property (any borrowing exceeding that limit would be subject to a scheme sanction charge of 40% payable by the SIPP/SSAS administrator).

What are the downsides to holding real property in a SIPP/SSAS?

• Rising costs: The overall cost of owning property in the UK is increasing. This includes new regulatory requirements for rental properties and rising business rates, both of which can reduce the net return to the SIPP/ SSAS
• Management burden: Trustees are responsible for tasks such as rent reviews and compliance with regulations like the Minimum Energy Efficiency Standards (MEES) for commercial properties. These obligations are becoming more time-consuming and expensive
• Property-specific risks: Holding property comes with inherent risks, such as difficulties in regaining possession from tenants.

What did the Budget in October 2024 change?

The chancellor has announced that, starting in April 2027, all uncrystallised pension pots, including SIPPs and SSASs, will be considered part of your estate for Inheritance Tax (IHT) purposes. This means the uncrystallised value of your SIPP/SSAS will now fall within the scope of IHT.

Notably, the government has clarified that if a SIPP/SSAS holds assets that would normally qualify for IHT relief – such as agricultural or business property relief (e.g. a farm) – those pots will not have their own allowances; rather they will need to share the deceased taxpayer’s allowance. The implications of this are far-reaching, particularly given the number of people who hold valuable real property within their SIPP/SSAS. Serious thought will need to be given to the lack of liquidity of many SIPPs and SSASs and how any future tax charge will be met.

The changes could also introduce an element of double taxation; any uncrystallised funds in the SIPP/SSAS being subject to IHT at a rate of 40% when the member dies and a further charge to income tax (if the pensioner dies aged 75 or over) when the beneficiary of the inherited pension draws it down. This could create an effective rate of tax of 67% for the highest earners.

There is a further knock-on effect for IHT allowances. In order to benefit from the Residence Nil Rate Band (RNRB) allowance, which can provide an additional £175,000 tax-free amount per taxpayer to set against the value of their home, the taxpayer’s estate must be worth less than £2 million. It looks likely that uncrystallised pension pots will be taken into account when considering this threshold, pushing many over the £2 million mark and, in turn, losing a valuable relief.

It should also be noted that the new rules will place a much higher administrative burden on SIPP/SSAS administrators, requiring them to liaise with the deceased taxpayer’s personal representatives to complete any necessary tax reporting and tax payments. This will likely delay access to pension funds for beneficiaries, who previously would have been able to obtain access to a pension more readily than the deceased taxpayer’s other assets.

Possible solutions

By its nature, a SIPP/SSAS restricts access to its assets until the beneficiary reaches pensionable age. The SIPP trustees could choose to sell a real property asset and reinvest the proceeds into other asset classes, such as bonds or stocks, to create greater liquidity. However, this could pose significant challenges for individuals who rely on land held within their SIPP/SSAS for use in their business operations.

Despite what many anticipated, the budget did not make any changes to the ability to withdraw a 25% tax-free lump sum on becoming entitled to other benefits under a SIPP/SSAS. There may be opportunities to use this to restructure pension pots and withdraw certain classes of assets.

For those who treated their SIPPs/SSASs as akin to a family trust and would not need access to assets to fund their retirements, there are a raft of other IHT and succession planning strategies on offer.

Maximising retirement wealth

In conclusion, SIPPs/SSASs offer a powerful and flexible wealth management tool, allowing individuals to take control of their retirement savings. With the ability to invest in a broad range of assets, including stocks, bonds, and even commercial property, SIPPs/SSASs provide a tailored approach to building wealth over the long term.

Whilst they come with certain complexities and risks, the potential for current income and capital gains tax advantages still makes them an attractive option for those looking to maximise their retirement wealth. As with any investment strategy, it’s essential to carefully consider personal financial goals and seek professional advice to ensure SIPPs/SSASs are the right fit for your situation. Before the changes to pension taxation come into effect, we would recommend undertaking a review to ensure any new IHT exposure is planned for and can be managed effectively.