Words: Ashley Rigg
Published: 15th April 2010
Top tips for creating SIPP-compliant property
With the upcoming ban on independent financial advisors (IFA’s) taking commission on regulated products the number of finance professionals keen to sell overseas property is set to explode.
Creating property that is compliant with UK pension rules is one way to access this market, although because investors are not allowed personal use, it is unlikely to ever account for the majority of IFA-led overseas sales, even for property in countries where it is permissible.
In the second of our two part series, former IFA, Pam Prince, who has just finished five months work ensuring her new development in Cyprus is SIPP compliant gives us eight practical tips on how to get the job done.
1. Choose the right SIPP provider
Finding a SIPP provider that has a good reputation in terms of financial viability, process and charges for the end-user is key.
There are a number of specialist firms in this market but it is a important to do your research. A good starting point is to ask the advice of IFA’s that you trust for their opinion. Two companies you may want to consider are Rowanmoor Pensions and Horn-Buckle Mitchell.
Note that whoever you use will need to know the volume of business that you will bring to them to assess the commercial viability of the project.
2. Choose an experienced IFA partner
You must have an IFA in place to transact the pensions work for your clients (The SIPP provider is not qualified to do this). They should be suitably qualified to transact pensions work and also be comfortable with the property market to be able to recommend this type of investment.
If experienced enough they may be able to help with the technical sign-off by assisting in the deposit structure process, advising on contracts and providing a guideline as to the viability of a potential client.
3.Have all your due-diligence documents in place
You must have the basic requirements in terms of paperwork available, ie, land title deeds, planning permission, purchase contracts etc… If these documents need to be translated into English – then get this done immediately. Make sure you have someone experienced enough to advise on contract structure and terms of business.
4. Ensure you have an up-to-date independent valuation
You need to have a current and up-to-date independent valuation. The valuation is also vital for formulating the deposit structures. Of course the availability of off-plan valuations varies from country to country but as a developer you should have already carried out feasibility studies to help you put a price list in place.
5. Define a conservative deposit structure
The deposit structure you choose is a key determinant of the risk profile of your investment when dealing with off-plan property. If you are too aggressive with your growth forecasts then the client’s pension can be left with a “black hole” that needs to be financed and risk is the buyer will lose the property if they cannot meet the shortfall.
According to HMRC guidelines, a client can only borrow up to 50% of the asset value.
In simplistic terms, this means that if you take a 50% deposit there is no speculation on capital growth needed at all. If you take a 40% deposit, you will have to predict the property will grow by 10% before completion for them to stick to the 50% ruling.
The lower the deposit you take, the bigger the capital growth speculation has to be or the bigger the discount! For complete peace of mind for our clients, we are not speculating on capital growth at all, in fact we are discounting the price for SIPP clients!
Finally, if you take staged payments during construction, then these need to be built into the payment scheme and clients will have to ensure that they have enough funds available within their SIPP to fulfil all their obligations. If you allow them to roll-up staged payments but charge interest, the interest due at the end will also have to be taken into account and covered by capital growth or by a further injection of funds from the client.
6. Partner with a mortgage lender
Ironically, given the tight regulation in other areas, you are not legally compelled to have a mortgage partner in place. However, it is good practice to manage the client’s risk. If they can’t get finance on completion, they’ll lose the property!
As a developer you may think that going to a bank at the moment to ask for lending to overseas buyers is ‘bad timing’ but actually if presented correctly, banks will see that their potential risk is reduced because of the lower loan to values. We ensured that we had our lawyer with us, proof of technical sign-off from the pension’s provider and a detailed business plan in terms of projected sales.
7. Factor in local taxation
A SIPP protects the client’s investment from UK tax but not necessarily from local taxation which your clients need to be aware of.
It is of paramount importance that you engage the services of a local tax specialist that understands the rules that apply in your country and also the rules relevant to SIPP investors. Avoiding these issues because some buyers don’t ask is not good enough and will only lead to disgruntled buyers and bad press – which we can all do without!
8. Invest in agent training
There are more people involved in a SIPP sale. So everyone has to be clear on the process otherwise time will be wasted, potential sales may be lost and agents will become disillusioned.
In our process, we pre-vet all clients before they are referred to the IFA in terms of how much they have available to directly invest in a new SIPP. If they are looking to transfer existing pensions, then we have to ensure that they have correct values before we pass them to the IFA for a full financial review.
In all cases, neither we nor the agents are allowed to give direct pension advice. You can only discuss the property itself, not the legal wrapping.
Pam Prince is co-director at Pure Cyprus Invest. For more information on their SIPP compliant development in Southern Cyprus or to find out what consultants she worked with, call Pam Prince on 01923 80 44 88 or email.
User Comments
I would urge developers to go significantly further than the points raised above before considering SIPPs for their developments.
I would go on to say that the above should be classed as simply good practice and not the legal requirements to achieve SIPP Compliance or SIPP Approval. In terms of the mortgages mentioned above, most commercial banks will not offer finance that sits alongside a SIPP as it would need to be non-recourse to protect the trustee unless a dual contract was put in place for borrowing outside of the SIPP as has emerged this year.
SIPPs will not be suitable for most developments, the investment case has to be there otherwise an IFA would struggle to justify good advice.
Guy Tolhurst,
Intelligent Partnership