LifeTalk Logo

Navigation

Over 11,000 Financial Advisers, IFAs, Financial Planners and industry professionals use LifeTalk to share best practice, get help with exams, find Social Media advice and much more. Sign-up FREE here.

 

 

Articles


Your client’s business can’t pay his SIPP the rent. Now what?

This article is intended for authorised financial advisers.
 
Commercial property is arguably the classic SIPP investment and connected party cases – the business owner 
whose SIPP owns his or her commercial premises – are the classic among classics.  Any successful commercial property investment can potentially do wonders for someone’s retirement provision and connected party cases can have additional, legitimate, benefits – for example, making it practical to invest in building alterations that benefit the business, all the while knowing that the tenant intends to stay and the landlord won’t move them out when the lease expires.
 
However, it is absolutely essential that clients are fully aware of the full implications of connected party ownership: it is not a meal ticket to be abused.  The big mental adjustment clients have to make is that they don’t own the property any longer, their pension does, and they may have two separate (and potentially conflicting) roles as landlord and tenant.  If a client protests “But it’s mine!” that should be a warning sign to advisers.  Where there are problems with SIPP property investments, one of the most common and problematic can be under- or unpaid rent in connected party cases. 
 
Part of the value advisers can add is to ensure clients enter into such arrangements with their eyes fully open.  To help advisers convey the risks and responsibilities that come with connected party cases, I’m going to look 
 
at how a provider goes about dealing with rent arrears.  Arrears only become unauthorised payments when they are deemed irrecoverable.  Before that happens, there are various stages the SIPP provider will go through to try to prevent this outcome.
 
The first step is to contact the member and adviser to find out why there are arrears and what has been, is being, or can be done to correct this.  If the provider ultimately becomes obliged by its trustee duties to submit an ‘Event Report’ to HMRC to inform them of the unpaid debt, the likely result will be HMRC imposing a tax charge of 40% of the unpaid amount against the tenant and a further 15% charge against the pension scheme administrator.  To clients, terms like ‘unauthorised payment’ and ‘event report’ probably don’t mean much or sound that scary; expressed as a percentage and converted into pounds, that changes.  Clients also need to be aware that the SIPP provider will be unable to process any benefit payment requests, property transactions (such as sales or new leases) or transfers out until the arrears have been cleared.  
 
The next step the SIPP provider is likely to take is to examine the terms of the original lease to find out if a deposit was paid or a guarantor provided.  This is unlikely where the tenant is a connected party as these steps are usually only taken when the tenant is not known to the landlord or has a poor credit history.  If a deposit or guarantor is provided, they can usually be used to clear the arrears, even if this is only in part. (The lease terms will confirm the situations in which the guarantor or deposit can be used.)
 
The third step would then be to put a repayment plan in place, wherever possible.  This should clear the outstanding amount, including any interest imposed by the terms of the lease, within the current lease period.  
 
For example, if the lease has 10 months left to run and the current arrears are £4,000 (including interest) the repayments should be at least £400 per month.
 
If the lease only has a short term to run then the tenant will have to clear the amount due in full before they can 
enter into a further lease.  If this is not possible, any remaining debt should be included in the terms of the new lease and the provider should take the advice of a surveyor to ensure they consider the repayment arrangement sufficiently commercial.  They should also be able to confirm whether, in the circumstances, a personal guarantor for the rent should be sought or a rent deposit paid. 
 
It is important to ensure that the actual rent due continues to be paid in addition to any amounts agreed in the repayment plan.
 
Sometimes things have reached a state where this is not possible.  If a tenant – including a connected one – is experiencing genuine financial difficulties, it may be possible to renegotiate the terms of the existing lease.  HMRC are willing to take a pragmatic approach to this as long as the re-negotiation takes place on a commercial basis. The costs of having a property lying empty plus the cost of securing a new tenant and putting a lease in place can sometimes exceed any losses that the pension scheme might make from a reduced rental income, and HMRC will usually take account of this.
 
The tenant would need to produce satisfactory evidence of the financial hardship and, before any rent reduction could be offered, the support of professional third parties such as a chartered accountant and a RICS surveyor would also be needed.  Their advice can take into account relevant current factors such as the financial prospects for the tenant, the costs of the property becoming vacant and the prospect of getting a new tenant.  A solicitor would then be needed to document any changes to the terms of the lease, often in the form of a side letter.
 
It is important to note that while this would help alleviate the difficulties the tenant has paying the ongoing rent, it would not automatically clear the arrears and these will still need to be dealt with on a commercial basis.
 
If none of the above steps result in the arrears being cleared, the SIPP trustee’s inevitable next step will be to commence legal action to terminate the lease and pursue the tenant for the outstanding rent.  At this stage the trustee and their scheme administrator would also be expected to begin an unauthorised payment event report with HMRC.  
 
Beginning an event report is not the same as submitting it.  It does not need to be submitted online to HMRC until January 31st following the end of the tax year in which the unauthorised payment occurred.  HMRC cannot see the report until it has been submitted but the provider should be able to share the online report with the member and adviser to let them update it or add their own comments.  There is no obligation to submit the event report to HMRC once it has been started.  If it has a salutary effect and the arrears are cleared, it can be deleted.  
 
Smaller debts (below £10,000 in England & Wales or £3,000 in Scotland) can be pursued through the Small Claims Court, although the provider would only be expected to do this where the tenant is not responding to correspondence or all attempts at mediation have failed.  If the above process is supported by documentary evidence, you should usually expect a quick decision in favour of the pension scheme.  If the debt is too big for the Small Claims Court, the provider may attempt legal action against the tenant involving a solicitor.  However, they will weigh up the merits and potential costs of the individual case before taking such a big decision. 
 
Put simply, the member has to treat a connected tenant just like any other tenant and pursue them with the same vigour.  The SIPP provider - as trustee - is obliged to make that happen.
 

Andy Leggett, Head of SIPP Business Development at Barnett Waddingham

 

Visit the Barnett Waddingham SIPP Forum on LIfeTalk - click here.

 

 

Author: Andy Leggett
Posted: Wednesday, March 02, 2016 | 10:34:26 AM


Bookmark and Share

Comments

14 June 2016 | 3:09:56 PM  Graham Phillips wrote:
Hi Andy. I have seen your article on IFALIFE. It is well worth your visiting our website www.rossmorefinance.com and give me a call on 01923 268468

Kind regards

GRAHAM PHILLIPS
Senior BDM

Leave a comment

You must be logged in to post a comment
Developed by BouncingFish