Connected Party Lease Setup: A Step-by-Step Example

Connected Party Lease Setup: Getting It Right from Day One

When a Small Self-Administered Scheme purchases commercial property and leases it to the company owned by the scheme members — or any other "connected" entity — the resulting arrangement is known as a connected party transaction. This is perfectly legal under HMRC rules, but it comes with strict requirements designed to prevent pension assets from being used in a way that unfairly benefits the members at the scheme's expense.

The connected party lease is the cornerstone of this arrangement. Getting it right from the outset prevents future challenges from HMRC and protects both the scheme and the company. This article explains exactly how to set one up correctly.

What Is a "Connected Party" in SSAS Terms?

HMRC defines a "connected party" broadly for pension scheme purposes. In the context of an SSAS property transaction, connected parties typically include:

• The sponsoring employer (the company that established the SSAS)
• Any company controlled by, or under common control with, the sponsoring employer
• Scheme members and their associates (including spouses, civil partners, and close relatives)
• Companies in which scheme members hold a significant interest

Most SSAS property-to-business leaseback arrangements involve the scheme leasing to the sponsoring employer — making this a classic connected party transaction.

The Overriding Rule: Commercial Terms

HMRC's fundamental requirement for connected party leases is simple but non-negotiable: the terms must be no less favourable to the scheme than those available from an arm's-length transaction. In plain English, the lease must be at market rent, on market terms, as if the landlord were completely unrelated to the tenant.

This requirement exists because the scheme's primary obligation is to its members' retirement outcomes. A below-market rent would effectively subsidise the business at the scheme's expense — exactly what the connected party rules are designed to prevent.

"We see connected party lease disputes with HMRC almost always stem from one of two problems: a rent that was set below market rate, or a rent that hasn't been reviewed as required. Both are avoidable with proper setup and ongoing administration." — Matt Lenzie

Step 1: Independent Rental Valuation

Before the lease is drafted, an independent RICS-qualified surveyor must assess the open market rental value of the property. The surveyor will consider:

• Comparable lettings in the local area for similar property types
• The property's size, specification, and condition
• Current market demand and vacancy rates
• Any specific features that affect lettability (parking, access, planning use)

The surveyor's rental assessment is not just a formality — it is the evidence base that HMRC can inspect. It must be prepared by a qualified professional, dated at or shortly before the lease commencement, and retained in the scheme's records permanently.

In our worked example, a 3,500 sq ft office building in a regional town centre is assessed at £32,000 per year on an FRI (full repairing and insuring) basis.

Step 2: Lease Structure and Key Terms

The lease is a formal legal document prepared by commercial property solicitors. For a connected party SSAS lease, the following elements are essential:

• Parties: The SSAS trustees (as landlord) and the sponsoring company (as tenant)
• Term: Typically 10-25 years, appropriate for the property type. Shorter terms may be possible for specialist properties but should be justified
• Annual rent: Set at the independently assessed open market value (£32,000 in our example)
• Rent-free period: None for connected party leases — a rent-free period would be a below-market benefit to the tenant
• Rent review: Upward-only reviews every 3 or 5 years, to be conducted by an independent surveyor
• Repairs and insurance: Full repairing and insuring (FRI) lease, so the tenant bears all property maintenance and insurance costs. This is standard for commercial leases and means the rental income flows to the scheme without deductions
• Use: The permitted use clause should be appropriate for the company's activities and the property's planning class
• Assignment and subletting: Connected party lease rules should address what happens if the company wants to sublet or assign the lease

Step 3: Trustee Resolution and Documentation

All trustees of the SSAS must formally approve the lease by way of a trustee resolution. This resolution should record:

• The property being leased
• The identity of the tenant (and their connected status)
• The rental valuation obtained and the surveyor's credentials
• The key lease terms agreed
• The trustees' collective view that the terms are no less favourable than those available on the open market

This documentation is not just good governance — it is the paper trail that will protect the scheme if HMRC ever questions the transaction.

Step 4: Registration and Scheme Records

Once signed, the lease should be registered at HM Land Registry (if for a term exceeding 7 years) and a certified copy retained in the scheme's permanent records. The scheme administrator must record the lease as a scheme asset and reflect the rental income in the scheme's annual accounts.

Step 5: Rent Review Process

The lease in our example includes 5-year upward-only rent reviews. At the review date:

1. The landlord (SSAS trustees) serves a formal rent review notice on the tenant (the company)
2. An independent surveyor is jointly instructed by both parties to assess the current open market rent
3. If the current market rent exceeds the passing rent, the rent increases accordingly
4. If the current market rent is below the passing rent (e.g., after a market downturn), the rent stays the same — "upward only"
5. The revised rent is documented by way of a rent review memorandum, signed by both parties

HMRC expects to see evidence of proper rent reviews. Failing to conduct reviews — even if the rent would not change — is a gap in compliance that can be difficult to explain later.

What Happens If the Company Cannot Pay Rent?

This is a question we are asked frequently. If the company (the tenant) falls into financial difficulty and cannot pay rent, the SSAS trustees have the same rights as any commercial landlord: they can pursue the company for arrears, forfeit the lease, and re-let the property to a third party.

In practice, trustee-directors often face a personal conflict in this scenario — they are simultaneously the landlord (as SSAS trustees) and the tenant (as company directors). This is why the scheme's rules and the lease must be crystal clear about the trustees' obligations to the scheme: their first duty is to the scheme's members, not to the company's financial interests.

"We always recommend that clients seek independent legal advice before entering a connected party lease. The conflict of interest is real, and having a professional trustee who can act independently if things go wrong is invaluable." — Matt Lenzie

Common Mistakes to Avoid

• Setting rent below market value without independent evidence
• Failing to include rent review provisions
• Missing scheduled rent reviews
• Granting a rent-free period to the connected party tenant
• Using a short-form lease agreement instead of a full commercial lease
• Not retaining the rental valuation and trustee resolution in permanent scheme records

Further Reading

For a broader understanding of how connected party leases fit into a full SSAS property purchase, read our £500,000 office purchase worked example. For guidance on the mortgage side of the transaction, see our guide to SSAS property mortgages.

Key Takeaways

• Connected party leases must be at independently assessed open market rent
• Full repairing and insuring lease terms are standard and protect scheme income
• Rent reviews must be conducted and documented at every scheduled review date
• Trustee resolutions and survey reports must be retained permanently
• Professional advice prevents costly HMRC challenges later

Get Expert Help

Setting up a connected party lease correctly requires commercial property solicitors, a RICS-qualified surveyor, and a scheme administrator who understands HMRC's requirements. Our team coordinates all of these elements for our clients. Get in touch to discuss your transaction.