Is the government looking to relax restrictions on residential property in pension schemes?
The UK government has signalled what could be a significant change in pension fund regulations with proposals to allow SIPPS and general pension funds to hold residential property. Up until now there has been a restriction on residential property in pension schemes to the extent that properties converted from commercial use had to be sold before they were deemed “residential”. So what is the government looking to do?
While nothing has been decided and this is only a consultation period, it looks as the UK government is looking to allow pension schemes to acquire commercial property and then convert into residential property.
Would there be any restrictions?
The danger in allow residential property into pension schemes is that, if there were no restrictions, individuals would simply acquire their own property using pension fund capital and this would be a simple way of extracting money from your pension scheme before retirement. It would also allow you to hold your home in a scheme which would protect it from capital gains tax and therefore would allow capital growth with no additional taxation.
Quote from PropertyForum.com : “The National Housing Federation (NHF) has today issued a damning report regarding the UK property market suggesting that a 22% increase in birth rates between 2001 and 2011 will lead to a significant shortage of property by 2020.”
The proposals from the UK government would allow pension schemes to acquire commercial property and then convert into residential property. However, these proposals would not allow you to hold your own home in your pension scheme or buy to let properties. In simple terms, even after converting the properties from a commercial to a residential basis, no additional income could be earned and therefore this would in effect mean that the asset would be sold as a residential property after conversion.
Fine print
This is not the first time that the UK government has looked at reducing restrictions on residential property within pension schemes as Gordon Brown initially flagged this particular move ahead of the “A Day” pension reforms in 2006. However, very quickly these proposals were changed and residential property was taken off the agenda only to appear again under the stewardship of George Osborne.
We do not have the exact details of this proposed change and we await the full consultancy documentation in due course. There will no doubt be various time limits, tax obligations and other conditions to ensure that there is not a general rush to dump property in pension schemes which could severely disrupt the market.
Why has the government changed its mind?
As the UK economy, and indeed the European economy, struggles to pull away from the after-effects of the 2008 recession, there is a feeling that the government is using pension schemes to tidy up the high street. As the Internet takes greater hold of the retail and services markets this has left many businesses to go under leaving a raft of properties empty on the high street. The idea is that converting these business premises into residential would not only make better use of the properties but could also go some way to solving the UK housing crisis.
It is common knowledge that over the years UK governments have manipulated the property market to ensure there was always more demand than supply which keeps the market very liquid and very fluid. However, it does seem as though we are on the verge of a major housing crisis with a significant shortage of properties meaning that what properties are available are being pushed towards levels unattainable for first-time buyers. This means that more and more people will need to rent property which further exacerbates the problem hence the reason why George Osborne has taken this relatively unusual step of considering allowing pension schemes to hold residential property.