What is an EPUT?
EPUT stands for Exempt Property Unit Trust. It’s a special type of unit trust. It qualifies as a “diverse investment vehicle” therefore it is exempt from paying tax on buying and selling assets or rental income such as property.
An EPUT has major advantages over a Small Self-Administered pension scheme (SSAS) or a Self-Invested Personal Pension (SIPP) when it comes to investing in property. An EPUT may invest in residential or commercial property unlike a SSAS or a SIPP which can only invest in commercial property. Moreover an EPUT may borrow money on normal commercial terms, typically up to 75% loan to value (LTV) whereas a SIPP or a SSAS can only borrow 50% of the net assets of the scheme ignoring the value of the property being acquired.
A QNUPS EPUT solution to holding Commercial and Residential Property
A QNUPS is a Qualifying Non-UK Pension Scheme.
The problem with holding property in an EPUT within a SIPP or a SSAS is that you can only effectively hold commercial property due to the restrictive rules. However, an alternative solution holds the EPUT within a QNUPS, which is not subject to HMRC rules as a Non-UK pension scheme. As it is not subject to UK pension rules it can hold commercial or residential property or both simultaneously.
Therefore the QNUPS buys the units in the EPUT, the EPUT holds the properties within its wrapper.
The QNUPS EPUT solution when you already own property in a SIPP
Let’s say you have £1 million of investments in your SIPP, including £500K in property.
- The SIPP invests its assets into the EPUT in exchange for units of the EPUT.
- The SIPP then sells the units to the QNUPS.
- The QNUPS buys the units in the EPUT, the value of the QNUPS is thus the value of those units i.e. the original value of the SIPP. The QNUPS buys the EPUT units through a loan from the SIPP.
- The QNUPS then pays back the loan at whatever terms are acceptable to the trustees.
- Once paying the loan back through the QNUPS, the member will be left with a SIPP worth £1 million, plus interest on the loan plus any investment growth if invested, and a QNUPS worth the Market Value of the assets within the EPUT.
The reason this solution is valuable to individuals with large SIPPs is that it allows them to effectively freeze their Lifetime Allowance (LTA) charge assuming the funds remain in the bank account earning zero interest. It means that their assets can continue to grow in the EPUT without incurring any higher LTA charge. In the long term, the initial advisory fees and maintenance cost of the QNUPS and EPUT is less than the saving on the LTA charge.
Moreover, as the effect of the lifetime allowance charge has been reduced they can potentially receive higher growth. Therefore, when the LTA charge is eventually paid it should be lower because the growth has been transferred to the EPUT instead.
You can speed up repayments to the SIPP, by paying cash into the QNUPS.
Do bear in mind that EPUTs are still subject to Stamp Duty Land Tax (SDLT).
Unfortunately, you can not eliminate your tax liability completely, you must still pay SDLT when you make purchases or acquisitions from existing registered pension schemes.
Therefore when you make an acquisition of property by a QNUPS or QROPS (Qualifying Registered Overseas Pension Scheme) indirectly using the EPUT as a pension asset transfer of land interests, it will trigger a chargeable land transaction at market value for SDLT.
An EPUT is able to borrow more money than a SIPP or SSAS
SIPPs or SSASs are usually limited to borrowing 50% of the net value of assets. Where VAT is payable it must be included in the maximum borrowing limit despite being later reclaimable this massively reduces the real value of the loan.
EPUT loans do not have the same restrictions. It can borrow an unrestricted amount, subject to terms acceptable to the trustees. This can be of huge benefit to those who may want to borrow to invest in new property, be it commercial or residential. By borrowing, you gear up your investments and can potentially gain a higher return on your investment.
Is an EPUT subject to taxes?
- No income or capital gains tax charges should come about on an EPUT.
- EPUT is only available to investors who are tax-exempt such as tax exemptions from within a SIPP.
So an EPUT (Exempt Property Unit Trust) has a number of benefits especially if you own property within your SIPP or SSAS pension scheme and you have a Lifetime Allowance tax charge issue or a potential one in the future. Certainly worth considering if you have an appropriate attitude to investment risk and risk tolerance. However, it is a complex area so it is important to take professional advice. You know it makes sense*.
An EPUT is an unauthorised unit trust so it is not protected by the Financial Services Compensation Scheme (FSCS).
QNUPS, QROPS and EPUTs are complex and higher-risk investments and only appropriate to sophisticated and high net worth individuals under certain individual circumstances.
The contents of this blog are for information purposes only and do not constitute individual advice. You should always seek professional advice from a specialist. All information is based on our current understanding of taxation, legislation, regulations and case law in the current tax year. Any levels and bases of relief from taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. This blog is based on my own observations and opinions.