If you’ve ever watched a property renovation show, there’s a good chance you’re familiar with the idea of ‘flipping’ properties. It’s the concept of buying properties, making some quick improvements, and selling them on again relatively quickly for a profit. This can be done on all kinds of properties, and might involve anything from a full-scale renovation of the building, to more minor improvements such as replacing flooring and windows.

While flipping properties – also known as property trading – may sound a potentially attractive proposition, it is unfortunately not possible when the properties in question are held in a pension. Property trading is not deemed a suitable activity for pensions, which are intended to be long-term investments. Where property trading is undertaken, it could be deemed a form of taxable property, which incurs heavy penalties in the form of HMRC’s unauthorised payments charges.

Unauthorised payments charges fall into three categories:

1. The standard unauthorised payments charge of 40%: in the context we’re discussing here, this would mean 40% of the value of the property (or properties) in question, as well as any deemed income from the property and any capital gains.
2. The unauthorised payments surcharge of 15%: this charge only applies if the value of the unauthorised payment (i.e. the property value) is worth more than 25% of the individual’s pension rights.
3. The scheme sanction charge of 15-40%: this is the most complex of the charges. The 40% charge applies to the scheme administrator, but it can be reduced if the normal unauthorised payments charge is paid. Assuming it is paid in full, the scheme sanction charges reduces to 15%. While scheme sanction charges apply to the provider, in practice providers are likely to charge them to the pension holder, unless the provider is responsible for the unauthorised payment arising.

This isn’t to say that it isn’t possible to develop commercial property within a pension: in fact, it is a very popular course of action among property investors. With the minimum energy efficiency standards (MEES) regulations already requiring affected owners to increase or maintain their energy efficiency rating in order to be let to tenants, we believe development works will only become more popular over the coming years – especially with more stringent MEES regulations coming into effect in 2023. Developing properties can have a range of benefits, from increasing the property’s capital value, to attracting better tenants and commanding higher rental income. However, clients and their advisers will need to take care that their investment intentions fall within regulations and would therefore not be classified as trading and incur these charges as a result.

Remember that property developments within pensions also have to meet certain regulations, so it’s important to make sure you follow your provider’s process and requirements. For more information about our process, please read our Developing Property guidance note before beginning any development works.

Kind regards,

Jessica List

Jessica has been with Curtis Banks for ten years. She has worked in the SIPP Support team helping clients and advisers with general queries, and the Product Technical team working on projects delivering legislative changes and delivering staff training. As Pension Technical Manager she focuses on helping advisers with queries, and writing technical content for Curtis Banks and the trade press.