Selling Property out of a SIPP/SSAS for Residential Conversion: Timing and Tax Explained

Once a pension fund has acquired commercial property, it is almost certain that the property will have to be sold at some point in order to fund retirement benefits. Depending on the location of the property the route to maximum value can be to obtain planning permission for conversion of the commercial property to residential use.

Why Pension-Owned Property Usually Has to Be Sold Before Conversion

Members of the pension fund might want to complete the property development themselves, in order to ensure they retain the maximum profit from the site. However, a pension fund is subject to draconian tax charges if it acquires or falls heir to a residential property. Therefore, the property has to be sold out of the fund before conversion is complete.

The Appeal of Keeping the Profit In-House

Many pension members want to sell the property out of the fund to themselves so they can complete the build and retain all the profit. However, members and their financial advisers are often conscious that income and gains made within the pension fund are exempt from income tax, whereas profits generated outside the pension are taxable.

Deciding the optimal tax point is a frequently asked question — so what does it look like?

The Tax Trap Most People Miss: SDLT, Not Income Tax

Most people are surprised when they discover that Stamp Duty Land Tax (SDLT) is often the critical tax concern — not income or corporation tax.

When the members buy the property out of the pension they will have to pay SDLT (or Land and Buildings Transaction Tax (LBTT) if they’re in Scotland). The higher the property value when the transaction occurs, the higher the tax bill.

How SDLT Rates Change Once Conversion Begins

This is compounded by the fact that once a residential conversion is commenced, and the property is ‘in process’ of being adapted, it becomes residential for SDLT purposes and a higher rate of tax applies.

If the project is high value, then the rate of SDLT can jump from 5% to 15%.

Real-World Examples: How Timing Affects Your Bottom Line

The following are some examples to show what the impact can be:

Example 1: A Smaller Residential Conversion Project

Example 1 shows a project where a £250,000 commercial property is being converted to a £450,000 residential property. The costs are estimated at £150,000 and profit before tax is £50,000. If the building is transferred out prior to conversion the SDLT is £2,000. If the transfer occurs when the conversion is near complete, SDLT could be £30,500 — wiping out 60% of the expected profit.

Example 2: A Larger Multi-Unit Conversion Project

Example 2 shows a larger project where a £2,500,000 commercial property is converted into three residential properties worth £4,500,000 between them. Costs are estimated at £1,500,000 and expected profit before tax of £500,000. If the building is transferred prior to conversion the SDLT is £114,500, whereas if the transfer occurs when the conversion is near complete, SDLT could be £468,750 — wiping out 90% of the expected profit.

Examples 1 & 2: Timing of transfer vs profit (in a table)

Example 1: A Smaller Residential Conversion Project (visual difference)

Example 2: A Larger Multi-Unit Conversion Project (visual difference)

Top Tips for Solicitors

1. Remind the client that allowing builders onto the site before completion can trigger a material SDLT liability — and that you, as their solicitor, will then be obliged to complete the SDLT return on that correct (higher) basis.
2. If dilapidation works are being carried out at the property prior to completion, it’s wise to request photographic evidence confirming that these pre-completion works have not continued into the planned conversion works.

Top Tips for Financial Advisers

1. If the client intends to sell a part-completed development out of the pension fund, bear in mind that a third-party buyer will likely have already factored the SDLT cost into their offer price — so the expected “development gain” may be smaller than the client anticipates.
2. Provided the client hasn’t yet gone into drawdown, profit made on the development outside the pension fund can potentially be routed back into the fund via pension contributions.

Top Tips for Pension Administrators

1. If there is an Option to Tax for VAT on the property, encourage the fund to take VAT advice alongside any consideration of SDLT — the two often interact and are easy to consider in isolation by mistake.
2. Beyond any SDLT saving, transferring the property out prior to conversion also avoids many of the commercial and practical issues that arise from carrying out major construction works within a pension fund, and removes the risk of a scheme sanction charge arising from residential property.

Conclusion: Why Timing the Sale Matters More Than You Think

Like with a lot of things in life, timing is everything.

The most tax efficient point to take a commercial property out of a pension, prior to completing a conversion to residential, is often earlier than people think — because they focus on income tax, forgetting SDLT (or LBTT).

If a client is considering something along these lines, advice from a specialist during the planning stage can prove valuable.

If you would like to discuss the requirements on a proposed transaction please call our Associate Director, Iain Harris on (+44) 0131 364 4191 or email iain.harris@ae-ca.co.uk. Iain is a tax adviser and VAT specialist for SIPP and SSAS pensions.

The above examples are simplified and for illustrative purposes only. They do not constitute advice. All transactions are different, therefore a bespoke calculation is essential.