Mixed use properties in pension schemes - upstairs downstairs

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18 February, 2020

Mohassan Mehmood
Senior Associate

Although there is a general perception that HMRC forbids specific types of investments into Pension Schemes, in fact there is no comprehensive list of prohibited investments. Instead, HMRC imposes tax charges on certain types of investment as a deterrence mechanism, in particular on what is defined as "taxable property".

Investment in taxable property will create an unauthorised payment charge on the member, and a scheme sanction charge on the scheme administrator. "Taxable property" includes residential property and moveable tangible assets "Residential property", in turn, is defined as property used or suitable to be used as a dwelling.

It is not uncommon to find a freehold property with commercial premises on the ground floor and a residential flat on the upper floor(s), particularly in town and city centres. Strictly speaking, acquisition of this type of property would fall foul of HMRC rules as being a taxable property as the freehold interest contains a residential element.

However, there are ways in which an acquisition could be structured to allow investment in a Pension Scheme. One option is for the Scheme to acquire a long leasehold interest in the commercial premises only. The freehold interest can then either remain with the existing owner or, if the owner wanted to dispose of their entire interest in the property, can be sold to another party (such as the Scheme member personally). If the parties acquiring the long leasehold and the freehold interests are connected, a Surveyor would be needed to report on the respective values of each interest so that this is documented and apportioned between the lease and transfer deed. Both transactions can be completed at the same time, so for all intents and purposes the deal between the parties remains the same; it has just been structured to ensure the Pension Scheme has no interest in the residential element of the property.

'Mixed use' properties of this nature should therefore not be disregarded when considering Pension Scheme investment opportunities as options may be available to facilitate the transaction.

For more information contact Mohassan Mehmood in our Commercial Property department via email or phone on 0333 207 1161. Alternatively send any question through to Forbes Solicitors via our online Contact Form.

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