Transferring / Purchasing Residential Property in QNUPS Pension

If you are reading this, it probably means you already know what a QNUPS is. You may also know that its uniqueness lies in the ability to hold residential investment properties within the pension, where they will grow free of capital gains tax. However, transferring an existing property into, or purchasing a new property from within the pension might be something you don’t know how to achieve. In order to enjoy the benefits of a QNUPS, the assets – be it money or property – have to be first brought into the pension. Transferring or purchasing an investment property (because only investment properties can go into the QNUPS) is a straightforward and regulated process. 

Transferring an existing property into a QNUPS

The transfer of ownership of the existing property for the purposes of HMRC and the Land Registry to QNUPS is a must. The significance of that step is for the pension administrator to become the owner of your assets. However, there are certain taxes that come into play during the process. 

Taxes when transferring property into QNUPS

They are Stamp Duty Land Tax (SDLT) & Capital Gains Tax (CGT) that will need to be paid when transferring an existing property directly into the pension. 

Capital Gains Tax

For tax purposes, it doesn’t matter how long you have owned the property, HMRC is only interested in gains made from April 2015 onwards. Capital Gains Tax is then paid at a rate of 28% of those gains and is due within 60 days of the transaction taking place. 

Stamp Duty Land Tax (SDLT)

The amount of SDLT that is due when a transfer takes place is dependent on the amount of outstanding debt or mortgage that you have against the property. When you purchase a property, you pay SDLT based on the transaction or purchase cost (plus additional duty dependent on whether it’s your first purchase and if you are not resident in the UK at the date of completion). 

Whereas when a transfer to QNUPS takes place, the SDLT is charged at the consideration value, which is the value of any outstanding debt you have against the property. Stamp Duty is a tax paid by the purchaser, but on transfer, there is no purchaser, just a transferee who is receiving the property on your behalf and that’s why you as the current owner will need to pay this tax for a second time, albeit at a lower level. 

In trying to simplify the amount of SDLT payable when transferring property, it reads like this:

If the property has no mortgage, there will be no SDLT to pay. If the property has an outstanding mortgage, then it is that loan amount that is used to determine what rate of SDLT is payable.

Related: Stamp Duty Land Tax Rates in 2022

You can transfer ownership of your property in one of two ways:

1. The traditional route is to transfer directly to the trust or the pension scheme.

Here the legal ownership is transferred from you to the pension scheme administrator and because the administrator is acting on your behalf and is not a true purchaser then any tax liabilities, such as CGT & SDLT must be paid by you. 

This mirrors a traditional sales process, where you are the seller, and the pension trustee/administrator will become the new legal owner post-transfer. If there are any outstanding mortgages against the property, then that debt would need to be repaid at the point of transfer and a new facility secured by the trustee (scheme administrator). Very few high street banks openly lend to trustees or pension schemes so this can become a bottleneck and a cause for concern as it is more difficult to secure. Not only that, but interest rates may also have changed for the worse, and it will likely involve paying new fees to lenders as well as penalties to the outgoing ones. 

It also means that the administrator would have to pay SDLT on the transaction amount – so effectively it means you would have to pay full rate SDLT for the second time on the same property. 

Clearly, this is not the most efficient use of funds, and for some clients cumbersome and cost-prohibitive. 

2. Utilizing a Declaration of Trust (DOT).

The current owner pledges the property to the pension administrator, so in law, he/she is no longer the owner, the administrator is. This is a much simpler way of achieving the same objective of getting the property into the pension without incurring any taxes, penalties, or unnecessary fees.

Using a DOT is accepted by HMRC and means that ownership can be changed without having to redeem existing, and secure new borrowings. The DOT allows those owners with borrowing in place to gift the property to the scheme administrator. On paper, the property changes ownership and the administrator end up holding it within the pension for the member’s benefit. 

For the member, this is a far simpler and cheaper way of getting the property into the pension without having to pay SDLT or refinance the units being moved in. It’s worth pointing out that no official property transaction takes place, so it won’t show up on the land registry. This methodology is recognized and accepted by HMRC, and any redemption penalties or fees incurred for securing a new mortgage would be small in comparison. 

Once the DOT has been executed and witnessed, the property is now held in the pension, and you are no longer its legal owner. Therefore, any rental income from the property must flow to the pension directly. Moreover, any maintenance costs of the property will be at the expense of the administrator rather than yourself as you are no longer the legal owner, but instead the beneficial owner.  

Buying a new residential property in QNUPS

Buying a new property directly in the QNUPS is also a possibility, and the process is slightly different to transferring an existing one. 

Reservation Form

With the pension open and the administrator knowing you are looking to acquire it soon, you can start looking for the investment property. The trustees/administrator must sign any reservation form rather than you, as it is the scheme making the purchase. 

Due diligence

The trustee will likely want to undertake due diligence on the developer if the unit is a new build project, and all usual searches if it is a new or existing dwelling. A conveyancer should be appointed to assist with the transaction. 

Purchasing with cash

Once those ducks are in a row you can move forwards. If you are purchasing in cash, then you need to make a cash contribution to the QNUPS pension for the agreed purchase price plus any taxes and disbursements that will be incurred. 

Purchasing with a mortgage

If a mortgage is to be secured, then a cash contribution equal to at least 30% of the agreed purchase price should be made and a request that the trustee/administrator reserves the unit and make an application to a lender for a loan, The borrowing process itself can take 3 – 6 months, so it’s best to manage the sellers’ expectations when using this method.

Exchange of contracts

With a deposit paid and a contract in existence between the seller and the buyer (pension), the next official milestone is to legally exchange or exchange contracts. Behind the scenes, the conveyancer is examining the contracts and conducting local searches in exactly the same way as he would if the property were being bought in an individual’s name. When both legal representatives are satisfied with contracts and the results of all searches and, if applicable, any mortgage application is well underway, then contracts can be exchanged, and a completion date agreed. 

Stamp Duty Land Tax

It’s worth pointing out that when purchasing new property through the pension, the SDLT is paid in the normal way at the corresponding rate for the property value and the status of the purchaser. Only if an existing property were being transferred to the pension, would SDLT be paid on the mortgage or consideration value of the property.

Completion and Payment

If borrowing is needed, on the day of completion, the conveyancer of the pension scheme will draw down the funds from the newly approved loan and complete the purchase by transferring the funds to the seller’s solicitor. At the same time, he will redeem any existing loans and account for both on a completion statement, which will be sent to the trustee/administrator.

Trustee fees

And onwards to the member, the trustee may charge additional fees for the work undertaken during the process of each additional purchase as they are announced. These fees will typically be charged at an agreed hourly rate and will be considerably less than the actual cost of redeeming old and securing new loans as well as any negative carrying cost that comes about because the new loan is more expensive than the old. 

Property management

Once the transaction has been completed, any instructions to letting agents find suitable tenants, and any subsequent rental payments should flow from the tenant, or his agent, to the administrator, and not to the member. 

Rental income

All rental income flows to the pension and is held by the pension pending any drawdown requests by the member once he/she reaches age 55. As any borrowings will be in the name of the trustee/administrator, the monthly repayments to the lender must come from him.

Do you have further questions about QNUPS?

Soteria Trusts specialises in advising clients who would like to save for retirement in the most tax-efficient way possible. And for all those who own investment properties, placing them in the QNUPS does not only benefit them in the short term (no Capital Gains Tax) but also in the long-term, as the property – but also money, stocks, bonds, or anything else you wish to place in the QNUPS is also Inheritance Tax-free. 

Therefore, if you own any UK-sited assets and are worried about yourself and your family having to pay high taxes for your success and wealth, please simply contact us to arrange an introductory meeting.