A SIPP or SSAS can buy commercial premises, including the offices, shop or workshop your own business trades from, and let them back to that business, provided the purchase is at market value and the scheme receives a full commercial rent. Residential property is treated very differently: for almost every SIPP and SSAS it is “taxable property”, and buying it triggers unauthorised payment and scheme sanction charges.

Why do SIPPs and SSASs treat commercial and residential property so differently?

The pension tax rules in Finance Act 2004 do not ban any type of asset. HMRC’s Pensions Tax Manual at PTM121000 says the tax rules impose no restrictions on what a registered pension scheme can invest in, but attach tax charges to certain investments, in particular those that take value out of the scheme and those that are “taxable property”. Taxable property means residential property and most tangible moveable property, and the charges apply under section 174A and Schedule 29A Finance Act 2004.

The taxable property charges only bite on an investment regulated pension scheme. PTM125100 explains the tests:

  • for a scheme that is not an occupational scheme, such as a SIPP, it is investment regulated if a member, or a person related to the member, is or has been able to direct, influence or advise on the investments held for their arrangement;
  • for an occupational scheme, such as a SSAS, it is investment regulated if it has fewer than 50 members and at least one member meets that self direction condition.

In practice almost every SIPP and SSAS meets these tests, so the safe working assumption is that residential property is off limits. Commercial property is not taxable property, so it can be held without those charges. While it is held, rental income is exempt from income tax under section 186 Finance Act 2004 and a gain on sale is exempt from capital gains tax under section 271 Taxation of Chargeable Gains Act 1992.

What counts as residential property for these rules?

PTM125200 sets out the definition from Schedule 29A. Residential property, in the UK or abroad, is a building or structure used or suitable for use as a dwelling, together with its garden and grounds, any building on those grounds, a beach hut, and timeshare style rights over part of a hotel. Some buildings that people live in are expressly not residential, including:

  • a home or institution providing residential accommodation for children;
  • a hall of residence for students (but not ordinary houses or flats let to students);
  • a care home providing accommodation with personal care;
  • a hospital or hospice, and a prison or similar establishment.

A scheme that owns or jointly owns the whole of a hotel holds commercial property. The problems come from mixed buildings. HMRC treats a shop with a wholly separate flat above as two buildings, so the shop is commercial and the flat residential. If the flat is interconnected with the shop, sharing an entrance so that you can move between them without using common areas, the whole building is one building suitable for use as a dwelling and is all residential. A house with two rooms used as a dental surgery is still residential.

Are there exceptions for flats used with a business?

PTM125200 describes two categories of “job related” residential property that are not taxable property:

  1. Property occupied by an employee who is not a member of the scheme or connected with a member, is not connected with the employer, and is required to live there as a condition of employment. HMRC’s example is a caretaker’s flat.
  2. Property occupied by someone who is not a member or connected with a member, and used in connection with business premises held by the scheme. HMRC’s example is a flat above a shop that is leased from the scheme together with the shop and occupied by the trader running the shop.

Both exceptions turn on who lives there. PTM125300 warns that if the property later stops qualifying, for example because it is relet to someone outside the condition, the scheme is treated as acquiring taxable property at that point.

What happens if the scheme buys residential property anyway?

Under PTM125300, when an investment regulated scheme acquires, improves, converts or adapts taxable property, an unauthorised payment is treated as made to the member whose arrangement holds it. The member pays the 40% unauthorised payments charge, the scheme administrator is liable to a scheme sanction charge, generally 15% of the value after credit for the member’s charge, and the 15% surcharge can also apply. Income or deemed income from the property and gains on its disposal are then charged to the scheme sanction charge at 40%. These charges are explained in our guide to unauthorised payments charges.

Conversions need care. A commercial building being converted to flats is not residential while the work is under way, because it is not yet suitable for use as a dwelling. It becomes residential once suitable, normally when works are substantially complete. A property sold before that point never becomes residential property.

How does the scheme buy premises from you or your company?

Buying from a member, a sponsoring employer or anyone connected with them is allowed, but the price must be what would be paid between parties at arm’s length. PTM121000 says that if the scheme pays more than the asset is worth, or sells for less, the difference is an unauthorised payment. An independent valuation at the date of transfer is the usual evidence. The purchase is otherwise an ordinary property transaction, and our Stamp Duty Land Tax guide covers the purchase tax side.

Many schemes borrow to complete a purchase. Sections 182 to 185 Finance Act 2004, explained at PTM124000, allow a registered pension scheme to borrow up to 50% of the net value of the fund immediately before the borrowing. The property being bought is left out of that value, existing borrowing counts towards the limit, and there is no separate allowance for VAT. Borrowing above the limit is a scheme chargeable payment taxed at 40% on the scheme administrator, and the excess must be reported in writing, for example on form APSS303, by 31 January after the end of the tax year. If the money comes from a member, the employer or someone connected with them, it must be lent at a commercial rate.

What are the rules when the scheme lets the premises to your business?

PTM121000 confirms that a sponsoring employer or member can rent property owned by the scheme, but must pay the commercial rent. Failure to pay the commercial amount leads to an unauthorised payment tax charge on the shortfall. A formal lease, a rent set by an independent surveyor and regular rent reviews are the practical safeguards.

Arrears are a separate trap. Under section 162(4) and (5) Finance Act 2004, as described at PTM123100, a debt owed to the scheme that is not collected on arm’s length terms is treated as a loan. A SIPP cannot make an authorised loan to a member’s company, and a SSAS loan to its sponsoring employer is only authorised if it meets the conditions in SSAS loans to the sponsoring employer. Letting rent build up while the company is short of cash can therefore create a tax charge even though no money left the scheme. If you own premises personally and let them to your company instead, the different rules are covered in renting property to your own company.

What does a typical purchase look like?

Illustration only. A SSAS has net assets of £400,000 and wants to buy a warehouse unit from an unconnected seller for £450,000, to let to its sponsoring employer.

Step Figure
Net value of the fund before borrowing £400,000
Maximum borrowing (50%) £200,000
Cash used from the scheme £250,000
Market rent agreed by an independent surveyor £36,000 a year

The unit is let to the company at £36,000 a year. If the directors later agree to charge only £26,000 for a year to help the company, the £10,000 shortfall is an unauthorised payment, with a 40% unauthorised payments charge of £4,000 before any scheme sanction charge. Had the building included a flat interconnected with the warehouse, the whole building would have been residential and the acquisition itself would have been an unauthorised payment.

What mistakes cause the most trouble?

  • Buying a mixed building without checking whether a flat is wholly separate or interconnected.
  • Rent holidays, rent below market value or arrears for a connected tenant.
  • Forgetting existing borrowing, or borrowing extra later to cover VAT, so the 50% limit is breached.
  • Converting offices to flats inside the scheme and keeping them after completion.
  • Letting a caretaker flat to a family member, which takes it out of the job related exception.
  • Personal use of scheme property by a member, which PTM121000 treats as a benefit in kind and so an unauthorised payment.

Contributions used to fund a purchase follow the normal relief rules, which are covered in our guide to pension contributions for business owners.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.