Can a SIPP Charge VAT? Understanding VAT Implications for Commercial Property in SIPPs

When buying a property, VAT may not always be considered beforehand, which may catch clients off guard. Dentons Pension Management Limited’s technical sales director, Stephen McPhillips, describes how

Purchasing commercial real estate through small self-managed schemes (SSAS) and self-invested personal pensions (SIPP) is still a common practice among clients, especially business owners and managers.

There are a variety of reasons for this, and the specific circumstances of each client will determine why they are making an investment of this kind. The reasons could include long-term capital growth in the value of the property (which will be exempt from corporation tax and capital gains tax upon eventual disposal by the pension scheme) or a steady (and frequently increasing) stream of tax-free income to the pension scheme. At some point in their careers, paraplanners may receive a property purchase inquiry from a client, for whatever reason.

Each property is different, and even if the SIPP / SSAS provider finds the property acceptable in theory, it is crucial to make sure the funding structure functions as intended. This means that it must be evident how the purchase price and all related acquisition costs will be covered. If there is a funding structure shortfall, it may prevent the transaction from happening, which would prevent the client’s goal from being accomplished and possibly result in a significant amount of time being lost in the process.

The SIPP / SSAS as the buyer (and any joint parties in the case of a joint purchase) must be able to cover additional costs associated with the transaction in addition to being able to pay the purchase price. These can include:

VAT is the last item on the above list, but it really deserves to be much more prominent than this. But frequently, it is treated more like an afterthought throughout, which can surprise clients.

The first thing to keep in mind when it comes to commercial real estate and VAT is that there is no general guideline that specifies which properties will and won’t be liable for VAT on the purchase price. For instance, one property may have been “elected for VAT,” which puts it under the VAT category, while the nearly identical property next door may not have been, meaning it is not subject to VAT. Early on in the process, the property’s vendor (or the vendor’s agent or solicitor) would need to confirm the property’s VAT status. VAT must be applied to the rent that the property’s tenant(s) pay if the property is subject to VAT.

In the event that VAT is charged on the purchase price, it amounts to 2020% of the purchase price. Therefore, if a property was purchased for £500,000, an additional £100,000 in VAT would need to be paid. A SIPP or SSAS may be registered for VAT, and the VAT portion of the purchase may be recouped from HMRC and transferred to the bank account of the SIPP or SSAS.

At this point, it is important to remember that any SDLT or LBTT liability is calculated using the purchase price PLUS VAT. The SDLT and LBTT liabilities in the aforementioned example would be determined using a £600,000 purchase price.

But in certain cases, even if a property is designated for VAT, VAT may not be due on the purchase price; therefore, the client should always seek and obtain expert VAT advice.

VAT would typically not be required to be paid on the purchase price if a TOGC applies.

Under the terms of a TOGC, VAT is not required to be paid on the purchase price and the business of leasing out commercial property remains a “going concern” regardless of the ownership of the property. One of the primary requirements for a TOGC to apply is the existence of a tenant with a lease prior to and following SIPP / SSAS purchase, though there are additional requirements as well. The SIPP / SSAS trustees would need to register for VAT and choose to tax the property in order for the TOGC to be applicable.

Any SDLT or LBTT liability would be based on the purchase price minus VAT because there would be no VAT due on the purchase price. e. Instead of £600,000, the purchase price of the property in the aforementioned example would be £500,000.

As readers will see from the above, VAT can play a big role in real estate transactions and in certain situations, it can make a potential purchase unfeasible. Nonetheless, a client may very well be able to meet their investment goals with the correct assistance from a specialist provider and from a specialist VAT adviser.

A monthly publication and website, Professional Paraplanner caters to paraplanners, financial technicians, administrators, investment IFAs, and other professional investors in the United Kingdom.

When considering a commercial property purchase within a Self-Invested Personal Pension (SIPP), one crucial aspect to understand is Value Added Tax (VAT). This article delves into the complexities of VAT and its implications for SIPPs, providing valuable insights for both clients and advisers.

Key Considerations for VAT-Registered Properties in SIPPs

1. Increased Purchase Price: For a SIPP acquiring a VAT-registered property, the purchase price automatically increases by 20%, significantly impacting funding and potentially exceeding annual contribution limits.

2. Impact on Stamp Duty: VAT also affects Stamp Duty, which is calculated on the total purchase price, including VAT. This can lead to a substantial increase in overall costs.

3. VAT Reclaimability: While SIPPs can reclaim VAT in most cases, the full purchase amount must be available upfront. This may necessitate borrowing, subject to HMRC’s 50% SIPP borrowing limit.

4. VAT Registration and Reclaim Process: The SIPP provider handles VAT registration and quarterly returns. Reclaiming VAT on the purchase occurs after the transaction is complete.

5. Exceptions to VAT Reclaimability: Certain scenarios, such as the nature of tenant businesses, may prevent VAT reclaim. Specialist VAT advice is recommended in such cases.

6. VAT on Rent: Rent received by the SIPP will be subject to VAT, which the SIPP provider pays quarterly to the VAT office.

Determining VAT Registration Status

1. Vendor Inquiry: The vendor should be able to confirm whether the property is opted for tax, based on their purchase transaction or subsequent VAT registration.

2. Rent Review: If rent is already being paid, check for VAT inclusion in payments.

3. HMRC Verification: If the status remains unclear, the vendor should seek clarification from HMRC.

4. Business Ownership vs. Property VAT Registration: Note that a VAT-registered business owning the property does not automatically imply VAT registration for the property itself.

VAT Application Processing Times

Historically, VAT application processing times averaged around three months. During the pandemic, this extended to nine months, but currently, it takes approximately four months on average.

Transfer of Going Concern (TOGC)

In specific instances, a VAT-registered property transaction can be treated as a TOGC, exempting VAT payment. Specialist VAT advice is crucial to determine TOGC eligibility. Generally, if a lease remains in place after the purchase, the transaction could qualify as a TOGC.

Benefits of TOGC:

No VAT payable on the purchase price.
Improved cash flow for the SIPP purchase.

Note: Even with TOGC, VAT applies to rent and the property’s sale (unless it’s another TOGC).

VAT Option for Non-VAT Registered Properties

In cases involving extensive development work on a non-VAT registered property within a SIPP, opting to tax can allow VAT reclaim on building costs.

Part-Purchase of VAT-Registered Properties

While possible, IPM does not part-purchase VAT-registered properties due to potential liability issues.

Deregistering a Property for VAT

Deregistering a property for VAT is generally not possible. However, specific circumstances may allow for revoking the option to tax, as in one instance involving IPM.

Understanding VAT implications is crucial for making informed decisions regarding commercial property purchases within SIPPs. By carefully considering the factors outlined in this article, clients and advisers can navigate the complexities of VAT and ensure a smooth and cost-effective transaction.

Additional Resources:

IPM Pensions: VAT registration of commercial property in a SIPP: here’s what you need to know
Macfarlanes: Fees paid to a SIPP administrator do not fall within the VAT exemption for supplies of insurance

Keywords: SIPP, VAT, commercial property, purchase, reclaim, TOGC, part-purchase, deregister, exemption, insurance, fees, administrator, Macfarlanes, IPM Pensions, VAT registration, purchase price, Stamp Duty, rent, HMRC, business, property, transfer of going concern, development work, building costs, part-purchase, liability, deregistering, option to tax, revocation.

But in certain cases, even if a property is designated for VAT, VAT may not be due on the purchase price; therefore, the client should always seek and obtain expert VAT advice.

After applying these standards to the case’s facts, the UT concluded that IML’s supplies for the IML SIPP’s provision did not qualify for the VAT exemption for insurance transactions. The UT dismissed IML’s claims that the yearly dues and other expenses borne by IML SIPP participants, along with a portion of their fund contributions, represented “premiums” for the provision of life and death benefits under the plan.

The UT also made a comment regarding the fact that the FTT in Winterthur (LON/96/1787), a case with comparable facts to the current one, reached a different decision. The UT came to the conclusion that subsequent CJEU rulings demonstrated the incorrectness of the Winterthur ruling.

IML offers services related to the setup, management, and operation of the IM SIPP, a self-invested personal pension plan.

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The UT also concurred that the insured party’s contractual relationship with the insurer provides the insured with some protection from the pertinent risk or uncertainty, which is a necessary implication of the essential features of an insurance transaction. When that risk or uncertainty materializes, someone other than the insured party is required to pay the relevant amount or provide the necessary service.

SIPP v SSAS – The Differences

FAQ

Is a SIPP taxable?

So in short, while some SIPP payments are tax-free, in most cases you’ll pay income tax on 75% of withdrawals. But this is just the same as paying tax on earnings or other incomes.

Can US citizens have a SIPP?

Contact the support team for further information. Can a US Person open a SIPP? Yes, US Persons (i.e. US citizens and/or US residents) will be able to open a SIPP account and transfer a pension.

Is a SIPP the same as a PPR?

It is a type of personal pension and works in a similar way to a standard personal pension. The main difference is that with a SIPP, you have more flexibility with the investments you can choose.

What is an international SIPP?

International SIPPs are Self Invested Pension Plans that are specifically created for non-UK residents. They offer clients a wide choice of investment opportunities and are the preferred option for anyone living outside of the EEA that wishes to transfer/consolidate their UK pensions.

Do I have to pay VAT if I buy a SIPP?

Where this is the case 20% must be added onto the purchase price when building your funding calculations. This can be reclaimed following the purchase by registering the SIPP for VAT. However, provision must be made to pay the VAT at the time of purchase. Remember, that stamp duty is also payable on the VAT element too.

Can a SIPP / SSAS register for VAT?

Hence, a property purchase price of £500,000 would mean that VAT of £100,000 would be payable on top. It is possible for a SIPP / SSAS to be registered for VAT and for the VAT element of the purchase to be reclaimed from HMRC and remitted to the SIPP / SSAS bank account.

How does a SIPP reclaim VAT?

The residual funds can then be invested into another investment product within the SIPP wrapper (e.g. a DFM) via a standing order set up to transfer rental payments at quarterly intervals. The SIPP is able to reclaim the VAT payable on the purchase.

How can I use a SIPP to buy a property?

Other techniques such as using the SIPP to purchase part of a property, using the transfer of going concern rules where the property is VAT elected or splitting the title so that the SIPP only takes on the commercial element of a building are also useful.