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Commercial property when held via a pension fund is governed by the rules and regulations imposed by HMRC. This is to ensure that all transactions undertaken, with particular reference to connected party transactions are dealt with on an arm’s length basis as there are additional HMRC requirements to consider.
When the landlord and tenant are connected, as they often are with property that is held within a pension fund, the question of when a lease should be renewed is a common one.
It comes down to the fact that the member trustees should be seen to be acting commercially and on an arm’s length basis.
Such transactions must be carried out on an arm’s length market value basis otherwise there could be detrimental tax consequences for the pension scheme.
Examples of a connected party are:
As an example, if you had a non-connected tenant in one of your pension fund properties, you would not be looking to let them carry on in a ‘held over’ position. As trustee, you would look for the tenant to sign a new lease to secure the future income stream for the pension fund.
Similarly, if the tenant is a connected party, you as trustee should be able to demonstrate that rent is being paid at an open market rental value. Therefore an open market rental valuation would need to be undertaken by a surveyor who is MRICS or FRICS qualified.
Sometimes when in a held over position you are prevented from increasing the rent which could mean you are paying below the market value. This means that the legalities of the lease could interfere with pension legislation and give rise to unauthorised payment charges.
It is worth noting that HMRC have pursued tenants for staying in a held over position on the premise that they are avoiding stamp duty.
Holding commercial property in a pension fund is extremely tax efficient but to protect that position leases should be kept up to date.
For more HMRC technical information with regards to pensions click here.
If you have any questions in relation to a lease held within a pension fund, speak with your usual financial adviser, or alternatively contact Karen Stettner on 01772 550778 or via email firstname.lastname@example.org