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How To Hold Residential And Commercial Property In A Pension

Your SIPP Or SSAS could invest in residential and commercial property via an EPUT, subject to complying with strict HMRC criteria for the investment.

What is an EPUT?

EPUT stands for ‘exempt property unit trust’.  It’s a specific type of unit trust.

In return for your investment in a unit trust, you receive units at the prevailing price.  The amount of income and capital due to you is based on the number of units you hold.

Unit trusts can either be authorised or unauthorised. 

Authorised unit trusts are regulated funds.  They provide protection under the Financial Services Compensation Scheme (FSCS).  They’re open ended.  They’re required to provide an element of liquidity.

Unauthorised unit trusts are not covered by the FSCS.  They’re usually closed ended with limited liquidity.  They’re often used to invest in property or limited partnerships, particularly for pension schemes or other tax exempt entities.  In this case, they’re referred to as ‘exempt property unit trusts’ or EPUTs.

The manager of an EPUT must be authorised and regulated by the Financial Conduct Authority.  The EPUT is granted direct tax exempt status by HMRC.


For SIPP And SSAS Investors, Here’s The Benefit

Instead of buying units in a unit trust from a major provider like Aviva or Legal & General, where it controls the investment decisions, your SIPP or SSAS buys EPUT units.  Because you make the investment decisions within the EPUT, which are usually property purchases, you retain full control of the investment decisions.

An EPUT is a powerful investment structure capable of facilitating many different outcomes.  Inefficient personal or corporate property ownership can be undone by using an EPUT, creating a solution that’s flexible, tax efficient and accurately matched to your needs.

An EPUT is just another asset that sits within your SIPP or SSAS, alongside your other investments.

Two Reasons To Set Up An EPUT In Your SIPP Or SSAS

1. An EPUT Can Invest In Residential And Commercial Property

Both SIPP and SSAS can hold commercial property assets.  As it’s a unit trust, an EPUT is not restricted to commercial property.  It can invest in residential property too.  Providing the EPUT adheres to the strict rules laid down by HMRC, it’s perfectly legal for it to buy, develop, trade and invest in residential property, making it possible for members of property clubs to combine together into a syndicate of residential property pension investors.

Your SIPP or SSAS is not directly holding the property asset.  Your SIPP or SSAS is holding units in an EPUT that invests in property.  When the property generates rental income or capital receipts, the distributions are returned to your SIPP or SSAS bank account, either to be reinvested elsewhere, or to be drawn as benefits, subject to you reaching age 55.


2. An EPUT Can Borrow Much More Than A SIPP Or SSAS

Both SIPP and SSAS can borrow money to finance the acquisition of commercial property.  This is normally limited to 50 per cent of the net assets of the pension scheme, subject to affordability.  It equates to about 30 per cent loan to value in real terms.

Where VAT is payable, the loan amount available is significantly less as VAT must be priced into the maximum borrowing limits despite the fact it’s reclaimable later.  It results in a loan to value of roughly 20 per cent in real terms.

There’s no such restriction with an EPUT.  It can borrow the VAT element of a transaction on an additional six month short term loan basis, repaid by the VAT reclaim after the purchase.

Your EPUT could borrow any amount, subject to affordability.  By way of example, if your SIPP or SSAS invests £100,000 in EPUT units, your EPUT could raise a loan of £300,000 to complete the purchase of a far more valuable commercial property.  The same applies to the purchase of residential property.

As part of the due diligence, an ‘internal rate of return’ calculation would normally be run.  With strong yields, such levels of gearing could easily produce a ‘double-digit’ return on investment, taking into account rental income and a relatively modest degree of capital appreciation.


When An EPUT Is Worth Considering

In addition to the two big features above, there are many situations in which an EPUT is likely to be a valuable addition to your SIPP or SSAS.


An EPUT enables smaller SIPP and SSAS to invest in property where it otherwise could not do so.


It’s possible for larger syndicates comprising unrelated investors to access residential property investments subject to the EPUT rules set out below.


Surplus rental income beyond that required to service the EPUT’s loan can be distributed to the SIPP or SSAS as an investment return, or it can be used for rapid debt reduction.


An EPUT could purchase larger property investments funded by a SSAS, which can have up to 11 members pooling their pensions, or funded by a group of SIPPs effectively acting as a syndicate.


Rental yields generated in conjunction with higher, more commercial levels of gearing can often produce a better return than many other investments.  An EPUT can be registered for VAT, and the VAT can be reclaimed.


The risks associated with the property are controlled by you, rather than having to rely on external unconnected investments, the performance of which is beyond your control or influence.


Property held as an asset of an EPUT is better protected from creditors compared to it being held directly in a SIPP or SSAS.


Future SIPP or SSAS pension contributions invested into the EPUT may be used to accelerate debt reduction.


An EPUT inside a SSAS enables members to pass on their funds to future generations free of inheritance tax without having to dispose of the assets in the EPUT, which can be important for business continuity.


The EPUT’s ability to borrow can allow older members of a SSAS to draw benefits when they want, even if the assets of the SSAS are fully invested in property or other illiquid investments.


Should a member of a SSAS die and benefits are to be paid out, the EPUT’s ability to re-gear enables funds to be made available.


An EPUT can receive cash investments to fund property acquisition and in specie transfers of assets, such as property assets already owned by the SIPP or SSAS to enable the SIPP or SSAS asset to be used as additional security for the borrower, and for its income to be used to augment debt servicing and affordability.


An EPUT can invest in a defined benefit SSAS, where the scope for contributions generally exceeds normal SSAS contribution limits because it’s not restricted to the annual allowance in the same way, allowing for greater deposits against a purchase.


It’s possible for company or personally owned property to be invested in the EPUT without the payment of tax on gains, and with future rental income and growth being sheltered from tax.


An EPUT is particularly suited to Property Clubs, Property Investment Networks and Property Syndicates of like-minded investors.

The Requirements For Residential Property Investment

Investor Rules

If the EPUT intends to invest in residential property with SIPP or SSAS investors, it needs to be established and operated as a Genuinely Diverse Commercial Vehicle, as defined by UK pension tax legislation.

In an EPUT containing an element of residential property, no SIPP or SSAS, either alone or together with one or more associated persons, may hold or have entitlement to more than 9.9 per cent of the units in the EPUT.  It means an EPUT needs to be invested in by at least 11 investors who are unconnected, with any connected/associated investors limited to 9.9 per cent collectively. 

No private usage of the property is allowed.

Investment Asset Conditions

The total value of the assets held directly by the EPUT is at least £1 million, or it holds at least three assets directly which are residential property.  In either case, no asset should have a value which exceeds 40 per cent of the total value of the assets held directly.

Whilst the criteria are complex, the EPUT manager would look in detail at the investment proposal and test them against HMRC’s full requirements.


Find Out More About EPUT

The role of the EPUT manager is a regulated activity.  It requires a number of important regulatory requirements to be fulfilled, such as the general administration of the EPUT, its investment transactions and assets.  It also includes the filing of annual audited accounts to HMRC to maintain tax exempt approval.

If you’re interested in the benefits of investing in an EPUT, your first port of call is your SIPP or SSAS operator. 

If it doesn’t offer an EPUT, please complete the form below, indicating your investment intentions, and we’ll point you towards a SIPP or SSAS operator that does offer an EPUT.

Complete The Form Below To Find Out More About EPUT

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This article is based on our interpretation of current legislation, regulation and HMRC practice.  It should not be relied upon as detailed advice or as a statement of law.  It is important to remember that current tax provisions may change in the future.  The nature of an EPUT’s investments involves certain risks fundamental to real property investment, geared or otherwise.

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