This week is Intergenerational Week – a global campaign to promote connections between the generations and draw attention to intergenerational issues. In financial services, one of the main intergenerational topics is transferring wealth. Sometimes this will involve passing on a physical asset – and if that asset happens to be held in a pension, there may be some careful planning required.
Many properties held in pensions are the business premises for the underlying client’s (or clients’) business. Often this means that when a client no longer wants to hold a property (or their share of it) in their pension, they don’t simply want to get rid of it altogether. In this edition we’ll look at two different forms of succession planning for a property investment.
During the client’s lifetime
It’s normally possible to undertake a ‘re-ownership’ process to change the owners of a commercial property held in a pension. This might take place gradually over a series of transactions: for example, if the client is part of a family-run firm where younger generations will eventually take over, those younger members might progressively take ownership of the property over time as they build up their own pension savings. Alternatively, a re-ownership might be completed in a single step. For example, if you have a group of professionals such as dentists or solicitors who own their property and one retires, their share might be taken over by the remaining members or a new partner.
The exact process involved will depend on how the property is held, which may vary between providers and products. For example, in Your Future SIPP cases, we legally own each property (or rather, one of our group companies, Suffolk Life Annuities Limited, does) and notionally split them between the clients’ pensions. Those re-ownerships don’t involve a change to the legal ownership of the property – just the notional split. This can save time and negate the need to involve a solicitor.
The second main succession planning route is for the property to pass to new owners as part of the death benefits paid from a client’s pension. Even where a client plans to pass on a property during their lifetime, they may still wish to plan for this eventuality in case the worst should happen in the meantime.
It’s possible for a property to pass to beneficiaries without leaving the pension wrapper, as an asset in beneficiaries’ drawdown. Beneficiaries can continue to benefit from the normal pension wrapper tax advantages, such as tax free rental income and no capital gains tax if the property is sold from the pension in the future.
It will be important to check whether your client’s provider and product can facilitate passing assets to beneficiaries in this way. It will also be important to make sure that your client’s expression of wishes is up to date, as this can affect the options available to beneficiaries. A client’s expression of wishes might still be relatively straight forward if they simply wish to leave their whole pension (including the property) to a single beneficiary, or split it equally between a group of beneficiaries. However, there may also be scope for clients to do something a little more unusual, such as nominating one beneficiary to inherit the property and asking for the remaining pension to be split between other individuals. Curtis Banks can normally accept requests like these – clients can either annotate our expression of wishes form or provide a supplementary covering letter to explain their wishes.
It’s worth noting that if a property is jointly owned and the prospective beneficiary is not one of the existing owners, the other owners may have first refusal to purchase the deceased’s share. This will depend on the agreement in place between the joint owners, which will supersede an expression of wishes. In situations like these, it may be beneficial for joint owners to discuss their succession planning in advance to help prevent any surprises or complications.
It may also be possible for a property to be ‘paid’ to a beneficiary as part of a lump sum death benefit payment, which would remove it from a pension wrapper. This is normally only possible in cases where the death benefits aren’t subject to income tax. Alternatively, beneficiaries may be able to buy the property from the deceased’s pension and then receive cash death benefits.
There’s a surprising amount of flexibility when it comes to succession planning with commercial property. If you have any questions or would like to talk to us more about the opportunities available, please click below to find the contact details for your local business development manager.
Curtis Banks is proud to support intergenerational fairness: we have partnered with the Intergenerational Foundation, whose mission is to protect the interests of future generations across all areas of policy. You can read more about our partnership and the Intergenerational Foundation’s 10 year report here.
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.