5 critical areas to discuss with clients before an in-specie transfer of property

You recently read about the three common times a client may get in touch with you because they want to transfer a SIPP or SSAS that holds commercial property in-specie.

A transfer in-specie of property between providers may not be the most straightforward piece of work you undertake. However, if all parties are aware of the processes involved in the transaction before a decision is made to proceed, this can assist in ensuring that you can manage your client’s expectations throughout.

You have read about the work that IPM undertakes in terms of holding commercial property in SIPPs and why the service we provide lends itself well to this kind of work. We also have one of the most cost-effective offerings in the market for commercial property SIPPs as we do not charge an annual property fee on top of the annual administration fee the client pays.

So, to help you manage expectations, read on for five key areas we feel you should discuss with clients before embarking on a transfer in-specie of property. These will help set the scene as to whether a transfer can take place, what to expect, and matters to consider as the transaction moves forward.

1. Rent arrears

While this is more pertinent to a client transferring to IPM (as opposed something that forms part of the transfer process) we are aware that other SIPP providers will consider this too.

If there are rent arrears on the property, it is highly unlikely IPM will accept a transfer in-specie. Where a property has arrears, IPM would be taking on responsibility for ensuring these are collected. In effect we are taking on a debt to the pension scheme and inheriting a problem.

Historically, in our experience, rent arrears on a property within a SIPP are rare. The provider usually takes on the responsibility of monitoring the rental payments and, where something is amiss, they will work with the property manager to ensure this is resolved as soon as possible. Often there was a reasonable explanation for this, and the matter was resolved quickly.

However, since March 2020 many businesses have been affected by the fallout from the Covid pandemic. This, in turn, has led to tenants who lease properties from SIPPs not being able to pay their rent, building up arrears that the provider needs to ensure are paid.

In some cases, the tenant is back up and running and they have put a repayment schedule in place to clear the arrears. However, in other scenarios we have been asked to take properties in-specie where arrears are in six figures.

2. The timescale

One of the two main things that can catch clients by surprise is how long a transfer in-specie of property can take. These are not like any other pension switches and the number of third parties involved in the transaction can result in a transfer taking some time.

Properties in SIPPs are owned by the SIPP trustee for the benefit of the client. Consequently, when a transfer in-specie takes place, the legal owner of the property will need to change from SIPP trustee A to SIPP trustee B.

The easiest way to look at this is that a transfer in-specie is like any other property transaction where a change of owner takes place. Both sides will need to employ solicitors and go through the usual conveyancing process and searches. The main difference here is that no consideration (money) will change hand at the end of the transaction.

For a straightforward transfer in-specie of property, the parties involved can be as follows:

Solicitors – As mentioned above, both providers will need a solicitor to act on their behalf for the transfer. The timescales that these solicitors work to are outside of the SIPP provider’s control and can vary. However, if you’ve ever been involved in any other property transaction outside of a SIPP, you will be aware how long such matters can take!
Surveyors – As the new SIPP provider will be taking on a new asset into their scheme (and thus a potential new liability), a surveyor will be required to provide the new SIPP provider with a full valuation of the property being transferred. While an existing valuation could be used if it has been produced recently, often a new report will need to be prepared during the transaction.
SIPP providers – If one of the reasons a client is leaving their existing provider is due to poor service then, unfortunately, this may continue during a transfer. As a receiving scheme, IPM will always do all that we can in a timely manner to ensure a transfer concludes as swiftly as possible. However, we are often reliant on the speed and accuracy of the information provided by third parties, including the current SIPP provider.

3. Costs

Often the cost of an in-specie transfer between providers can catch clients by surprise. Again, this comes back to the fact that legal ownership of the property is changing hands.

As considered above, the process of transferring a property is similar to any other property purchase. The largest cost for a transfer in-specie is likely to come from solicitors, as both SIPP providers will need to appoint a solicitor to act in their interests.

Where possible, we will work with a member from our panel of solicitors. This not only ensures that the transaction completes as swiftly as possible, but gives us confidence that the chosen solicitor has experience with working on commercial property in SIPPs, which can be different from standard transactions.

As a basic fee, our panel solicitors will charge £1,250 to act on a transfer in-specie (note that if there is more than one client transferring this is split accordingly). Other fees may apply depending on the nature of the transaction.

As IPM would be accepting a new property, and consequently a potential new risk into our scheme, we will need the usual searches to be undertaken on the property as you would do in other transaction. This will also lead to further costs.

Section 5 of our panel solicitors’ fee schedule contains a breakdown of the costs levied by IPM’s panel solicitors to act on a transfer in-specie.

It is important to remember that the ceding scheme’s solicitors will also make their own charges. A client should establish these in advance of the transfer taking place.

A valuation from a RICS surveyor will also be required as part of the transfer process. If a recent valuation has been produced for the property, it is possible that this could be used to save costs. IPM does not operate a panel of surveyors so the choice of firm, along with the costs, will be down to the client.

Even though the costs to transfer may be high, as IPM has one of the most cost-effective offerings in the market for SIPPs that hold commercial property, often the costs of transfer can be offset by the savings in fees a client is paying, so long as the property continues to be held in a SIPP.

4. If there is existing borrowing

Transferring a property in-specie where borrowing in place is not an insurmountable problem, however it does bring about complications.

Usually there is the option to “port” (transfer) the existing deal from the current SIPP provider, although this is at the discretion of the bank.

If a bank is unwilling to do this, then the only option would be to renegotiate the terms of the loan. In some instances, this may be in a client’s interests. On the other hand, a bank may not offer the client such an attractive rate and further arrangement fees may apply.

Regardless of how the loan is dealt with, it means another third party becomes involved in the transfer with the additional paperwork this entails. All of this will take time and the transfer cannot proceed until this is in order.

5. If the property is VAT-registered

It is not unusual for a property to be VAT-registered. If a property is VAT-registered and is acquired by a SIPP, then the SIPP can usually reclaim the VAT on the purchase price. This can often be a significant amount of money.

An ongoing consequence of this is that the SIPP provider will need to opt that individual SIPP into tax to make the reclaim. Going forward, all rent will have VAT added to it. It will be the SIPP provider’s responsibility to ensure that quarterly VAT returns are completed and that any VAT collected is sent to the VAT office.

While this is all possible, it is the initial VAT registration process that can be time-consuming.

Since March 2020, processing times for VAT applications at HMRC have increased significantly. Indeed, at one point, it was not unusual for an application to take six months or more to be processed.

As of January 2023, four or five months is more the norm (although some applications are processed quicker). Your client needs to bear this timescale in mind as the minimum amount of time it will take for a VAT-registered property to be transferred.

Get in touch

If you have any clients who wish to transfer a property in-specie, please get in touch and we can answer all your questions. Email info@ipm-pensions.co.uk or call 01438 747151.