The scenario

Here is a typical scenario –

An SME business owner has found a new property on the market in their local town.

The property is being offered on a freehold title basis and consists of a retail space at street level with a residential flat above.

Both the flat and the retail space are empty and the client plans to move in to use the premises for their business.

The property is valued at £250k, and the valuation shows this to be equally split between both the residential and non-residential parts.

The issue

In its current form, the SIPP cannot purchase this property. This is down to the residential part which is not permitted as a pension asset. It can only purchase the non-residential part.

If it was owned by a SIPP or SSAS, the residential part’s ‘value’ would be classed as an unauthorised payment and highly punitive tax charges of up to 55% can be applied – something to be avoided!

In England and Wales, a freehold title includes all land and buildings above and below the property without limit. Although freehold titles can be split, this only applies to property adjacent or next to another. Anything placed above or below cannot be split. Flats are a good example of this.

A solution

This is where it can become a little complex, however developing an effective plan and involving a solicitor early in this process can pay dividends going forwards.

The solution is to create a new leasehold title within the existing freehold title, as follows:

1. Offer is made to the vendor to purchase the property for £250k
2. Valuation is carried out by a surveyor – this confirms the likely leasehold title value of the non-residential retail space
3. SIPP is setup and funded from contributions/transfers

• Solicitor is formally appointed by the SIPP to act on its behalf
• Legal work commences to transfer freehold title
• Simultaneously the solicitor creates a new leasehold title on the non-residential part
• The freehold transfers to the client and leasehold to the SIPP
• SIPP releases £125k to the solicitor, client releases £125k to the solicitor
• Vendor receives £250k for the freehold title

In this solution, there are some key factors as to why this works for all concerned. These include:

• The vendor sees one buyer, one offer and one payment –much simplified from their view
• The SIPP will become the leasehold title ‘owner’ of the permitted non-residential retail space
• The SIPP will have no ‘interest’ in the residential part
• The client can choose to retain the residential flat and let out, sell on to A N Other or possibly convert into a new commercial/non-residential space –this gives business expansion options or the possibility of leasing out to other businesses

Next steps

This is merely an overview and not professional advice; If you want more details or have further questions, then please contact Ian Spreadbury on 0781 300 9882 or 02088905707, or ian@providencefinancial.co.uk