Tom O’Neill, Farleys:
Property and pensions can be excellent long term investments. But what happens if you combine the two and invest your pension in property? Here’s how it can be done via a Self-Invested Personal Pension (SIPP).
What is a SIPP?
A self-invested personal pension (SIPP) is an investment-regulated pension scheme where you can invest in a wide variety of asset classes and enjoy the tax benefits of a pension. It holds investments until you retire and start to draw a retirement income. It is a type of personal pension and works in a similar way to a standard personal pension. The main difference is that with a SIPP, you have more flexibility with the investments you can choose.
A self-invested personal pension (SIPP) is an investment-regulated pension scheme where you can invest in a wide variety of asset classes and enjoy the tax benefits of a pension. It holds investments until you retire and start to draw a retirement income. It is a type of personal pension and works in a similar way to a standard personal pension. The main difference is that with a SIPP, you have more flexibility with the investments you can choose but be very vigilant to avoid mis-sold investment claims.
How to Invest in Commercial Property in a SIPP
There are two ways you can invest in commercial property via a SIPP, by investing in a commercial property fund, or buying commercial premises and putting them in a SIPP. This is proving popular with small business owners who put their own commercial premises into their SIPPs. Those with large pension pots may consider buying other commercial premises to hold within their SIPP.
What Types of Commercial Property Can I Invest in?
Most SIPPs allow you to select from a range of commercial property assets, including:
- Offices
- Shops
- Factory units
- Warehouses
- Hotels
- Care homes
- Student accommodation
What are the Advantages of Holding Commercial Property in a SIPP?
- In terms of the benefits of using a SIPP to invest in property, a clear advantage is the offer of potentially strong capital growth. As property is commonly held for a significant length of time, gains may be large. The yield on property tends to be higher than the dividends from funds and equities.
- It releases capital back into the business to help with cash flow. Many business owners may benefit from buying their work premises through their pension, as this can make significant amount of cash available to the business for investment.
- There is no capital gains tax on the sale of the property. Any capital gain resulting from an increase in the value of the property is exempt from capital gains tax.
- No income tax on rents received – any rental income is exempt from income tax. If VAT applies to the purchase of a property, it is possible to register the SIPP and elect to tax in respect of the property and reclaim the tax on the purchase price and/or any landlord improvements.
- It’s not accessible to creditors in the event of personal or business bankruptcy. A property held in a pension scheme is in a totally separate legal entity to the member and/or his company so it would be protected in the eventuality of financial distress of the member or the company.
- There is no individual or corporate liability on SIPP loans. Where the investor is also the owner of the business renting the property from the SIPP there may also be benefits to the business as rent is an allowable business expense.
- It can be purchased in conjunction with other SIPP investors, such as work colleagues. Owning a business property can also be useful for succession planning, where instead of purchasing via a number of individual SIPPs; a group SIPP or small self-administered scheme could be instead used to enable property ownership to remain unchanged.
- On the SIPP holder’s death, it could be transferred to a beneficiary as a ‘death benefit’. The death benefit rules make investing in commercial property more popular for members even into retirement, because it can be handed down the generations, tax free in some cases.
- It falls outside of an estate for Inheritance Tax purposes and with the possibility of leaving the pension and the asset to a non dependent beneficiary as a pension fund, rather than paying it out as a lump sum, there is much greater scope to avoid the sale of the property on death.
- You can also borrow up to 50% of the net fund value of the SIPP for the purpose of buying a commercial property within a SIPP.
As can be seen, a Self Invested Personal Pension scheme (SIPP) may be an efficient way of saving for retirement by investing in commercial property.
How can I get a SIPP?
- In order to invest in a SIPP, you must be a UK resident or transferring from one UK pension scheme to another. Once the pension scheme is established, the funds can paid into the SIPP by contributions or transfers from other pensions.
- It is important to seek independent financial advice to set up the SIPP and to consider your options regarding your investment. Furthermore, legal advice will be needed in terms of the property purchase.
Get in touch
Farleys’ dedicated team of commercial property solicitors have experience in the acquisition and disposal of commercial property using SIPPs, acting for various sizes of pension scheme administrators throughout the North West.
We have developed specialist expertise and regularly act for self-employed individuals and companies who purchase or transfer their business premise through their SIPP.
