Land might not be every client’s first thought when considering commercial property investments, but there are plenty of opportunities available to explore, writes Jessica List
It’s well known that when it comes to commercial property investments, pensions can only purchase the bricks and mortar: anything moveable such as fixtures and fittings aren’t allowed. But what about cases where there isn’t even a building?
Purchasing land is also popular among pension investors, although there are some important points to consider. It’s worth noting that these top five tips don’t apply exclusively to land, but they tend to occur more often with land purchases than with traditional commercial buildings.
1. Liquidity
Normally a key element of a commercial property investment is having a tenant so that the pension can benefit from the rental income. Many commercial buildings already either have a tenant when purchased, or have a new tenant moving in as part of the arrangement – for example, where a client uses their pension to purchase a new premises for their own business. With land purchases, there are more instances where there is neither an existing tenant nor immediate plans for one - for example, where a plot of land is being purchased primarily for its potential for future development.
Where this is the case, it’s important to consider how the pension will meet ongoing costs such as fees. This might be a relatively minor point to consider in a case where the land makes up a relatively small part of a larger pension with good liquidity elsewhere; conversely, it could present a significant planning challenge if the client was hoping to use the majority of their pension to fund the purchase.
It will also be important to check the intended pension provider’s requirements. Some providers won’t acquire vacant properties in light of these risks; others may allow them, but will have requirements about the amount of liquidity required in order to help avoid issues further down the line.
2. Development
Development works can form a part of any property journey; however, with land purchases, it’s more likely that this will involve building something from scratch rather than making changes to an existing building. Here it’s important to remember that pensions can’t hold residential property.
When a property is being built or developed, it can be very difficult to pinpoint exactly when it becomes classed as residential. This is therefore another area where it’s very important to check with the pension provider involved about their requirements. For example, some might say that they are happy to hold land that has residential planning permission but require the land to be sold from the pension before any building work actually begins.
3. Trading
Some clients might hit on the idea of repeatedly buying land, developing it (or at least getting planning permission) and then selling at a quick profit – particularly given that there would be no capital gains tax to pay when selling property from a pension. However, pensions are intended as long term investment vehicles, and HMRC doesn’t deem property trading an appropriate activity for pension funds. This isn’t to say that it isn’t ever possible to develop land and sell it at a profit; however, once again, it’s best to check with your provider to check what measures they have to help ensure the pension doesn’t get caught by these rules.
4. Personal use or gain
While clients can be the tenants of properties or land held in their pensions, it isn’t permitted for them to benefit from the properties or land personally. This can take a couple of different forms.
Firstly, it isn’t permitted for a client to personally use the land. For example, someone who bought a vacant plot of land couldn’t decide to use it as storage in the meantime; similarly, someone who held a field leased as grazing land couldn’t come to an agreement with the tenant to also allow their own animals onto the land. This potential issue sometimes arises where the land in question is close to, or adjoining, other land or property that the client owns and uses – for example, if someone purchases a farm and keeps the farmhouse and gardens as their residence but sells the farmland itself.
Care also needs to be taken if the client (or a connected party) owns an adjacent piece of land or property that increases in value because of the pension purchase.
5. Separate property
Finally, the piece of land in question needs to be entirely separate and saleable in its own right. Again, this is an issue which tends to arise more often where the piece of land being considered is being separated off from another property, such as fields or farmland being separated from any adjoining residential elements.
The surveyor will need to consider issues such as whether the land has clear boundaries, and whether it has its own access. It will also be important to make sure there is a market for the land in its own right, to avoid the risk of the pension being left with an asset that can’t be sold when the time comes.
Land might not be every client’s first thought when considering commercial property investments, but there are plenty of opportunities available to explore.
Jessica List is pension technical manager at Curtis Banks
