What Is A Property SIPP?

Buying commercial property with your SIPP or SSAS fund is a popular choice due to the rental income generated and the prospect of capital growth in the property value, both of which are tax free.  Generally speaking, property can be less volatile than stockmarket investments.

Your SIPP Or SSAS Can Directly Hold Commercial Property

Many business owners benefit from tax free rental income and capital growth through buying their trading premises with their SIPPs or SSAS.  Not only does it provide security of tenure for the business, it's a tax efficient exercise for the SIPP or SSAS too.

In essence, your pension fund directly owns a commercial property. It can be the property from where your business trades.  Or you can let it to a business with which you have no connection.

5 Potential Benefits Of Creating A Property SIPP Or SSAS

Here are the top 5 reasons for having a property SIPP or SSAS.

1. Capital Gains Tax Free Property Growth

Any growth in the property value is free from Capital Gains Tax. So if your property appreciates in value, no Capital Gains Tax is payable.

2. Tax Relief For Business Use

If your business is leasing the property from your SIPP or SSAS, the rent your business pays is an allowable business expense.

3. Tax Free Rental Income

If your SIPP or SSAS charges £1,000 in monthly rent to a business using your commercial premises, that £1,000 payment would not be subject to any tax because it's reinvested in your SIPP or SSAS.

4. No Inheritance Tax Liability

If you die, the property invested in your SIPP or SSAS should be fully exempt from Inheritance Tax.  Inheritance Tax is normally payable on property held outside of a SIPP or SSAS.

5. Your SIPP Or SSAS Can Borrow

If you don't have enough money in your SIPP or SSAS to purchase the property, your SIPP or SSAS can borrow up to 50% of the value of your pension fund to complete the purchase.

Case Study

Property SIPP
ROBIN DASHWOOD
Robin ran an optical practise from rented offices.  Robin’s landlord told him he intended to sell the building.  Robin had worked in the area for years and didn’t want to move as he’d built up a great reputation. He liked the idea of creating a property SIPP which would own commercial property, not least because it would secure the location of his business.

Having spoken to a specialist SIPP adviser and having carried out some property analysis in the area, Robin decided to buy the property jointly between his business and a new SIPP. Once the results of a detailed pension review had been considered, he created a SIPP by transferring a preserved company pension and two smaller personal pensions.  When the money arrived in the new SIPP, it was held in cash, ready for the completion date of the property purchase.  The purchase was completed as follows:

  • Transfer of existing pensions to provide a cash fund with a new SIPP.
  • The cash fund was increased by a pension contribution from Robin’s business, which attracted tax relief.
  • A top-up loan from Robin’s bank, who were supportive of the transaction.
  • The balance of the purchase price was provided by Robin’s business.
  • On completion, ownership of the property was 70% by the SIPP and 30% by the business.

The purchase was only possible by utilising the money in Robin’s pensions. The pension analysis had revealed his funds hadn’t been performing well, so was Robin was happy to move the money to a SIPP. 

He loved the idea of paying rent to his own pension, rather than his former landlord.  He believes property prices are set to rise in the future, but he’s aware this is by no means certain.  However, he’s looking forward to clearing the bank loan from the rental payments, so that once it’s finished, his pension fund will grow more quickly towards providing him with a comfortable retirement.  Finally, as the new property owner, he’s secured his trading premises for as long as he wants the business to continue.


Unfortunately A Residential Property SIPP Or SSAS Isn't Possible

It nearly happened.  But in a landmark U-Turn in 2005, Gordon Brown changed his mind and scrapped plans to allow SIPPs or SSAS to hold residential property.

Only commercial property can be held in a SIPP or SSAS. Residential property, irrespective of whether it's your main residence, a holiday home, or even a "potentially commercial" buy-to-let property is not allowed in a SIPP or SSAS.

That said, there are rare occasions when a residential element to a property is permitted: for example, where it's necessary to provide living accommodation for staff.  And occasionally, some forms of student accommodation.  However, the SIPP or SSAS holder cannot benefit from use of the property.

Beware, HMRC doesn't take kindly to such breaches.  It can impose an unauthorised penalty payment of 55%, and in some cases, substantially more!

It's A Commercial Transaction

Buying a commercial property using your SIPP or SSAS isn't a clever way for your business to acquire cheap premises.  The whole deal needs to be set up on a commercial basis.  Your business will have to pay a market rent and sign a lease, which can include provisions such as rent free periods, like a third party tenant would have to do.

The benefit, of course, is that your SIPP or SSAS receives the right level of commercial rent.  It goes straight into your SIPP or SSAS to meet your loans repayments, and any surplus grows the value of your fund.

As with any investment, you need to carry out detailed due diligence, to ensure your purchase represents good value for money.  Not just its ability to deliver a constant and attractive level of rental income.  But also its potential for capital growth. The good news is that both of these elements are tax free in the hands of your SIPP or SSAS. 

If You Don't Have Enough Money In Your SIPP Or SSAS, Borrow

SIPPs or SSAS can take out loans to complete the purchase of a commercial property.  So whether you have a shortfall on the money you need, or you simply want to leave some money invested in other assets so you don't 'put all your eggs in one basket', your SIPP or SSAS can borrow money.

A SIPP or SSAS can borrow up to 50% of its value.  Despite the present unwillingness of banks to lend generally, many business owners have found most banks have an open mind when it comes to SIPP or SSAS lending.  It's likely to be due to the relatively low loan-to-value compared to other forms of borrowing.

If your business is going to be the tenant of the property, the bank will want to ensure your firm has a stable trading history and sufficient cashflow to meet the rental payments.

If your SIPP or SSAS is buying a commercial property to rent to a third party, there are likely to be fewer banks interested in lending.  Those that will consider the proposal will usually want to either see a sitting tenant, or at least a building that will let easily.

You Need To Find The Right Property SIPP Or SSAS Operator

You may already have a SIPP or SSAS, but that doesn't mean it's one that allows commercial property purchase.

In line with all types of UK property, commercial property is not regulated by the Financial Conduct Authority.  SIPP operators, however, are regulated, and since the beginning of 2013, the rules have changed regarding investments that aren't regulated.  As a result, some SIPP operators are no longer willing to hold commercial property within their SIPPs.

If you have a SIPP, you should check with your SIPP operator to see whether it's one that'll allow you to hold commercial property, and whether it imposes any restrictions on the type of property.

If you don't have a SIPP or SSAS, you'll need to create one. That could be achieved by transferring the value of other pensions, or making contributions either personally or from your business.

Before you take any action, once you have an idea of the sort of commercial property you're interested in buying, you're ready to approach SIPP or SSAS operators to see if they're willing to accept that sort of property into their SIPPs or SSAS. And of course, what fees they'll charge you, both initially and on a continuing basis.

Finding the right SIPP or SSAS operator and transferring pensions can be tricky. Invariably, it'll take much longer than you expect - often several months from start to finish.  So to avoid missing an attractive deal, you'd be wise to carry out your research and set up your SIPP or SSAS ahead of agreeing to purchase the property.  If your SIPP or SSAS is created quicker than expected, you can always hold the money in cash in your SIPP or SSAS, ready for the completion date.

Without any hesitation, you should always seek professional advice to avoid costly mistakes.  That includes HMRC penalties, excessive fees on transferring your pensions, and the cost of setting up and running a new SIPP or SSAS.

Don't Forget VAT

When you make your offer, you should check whether the property is subject to VAT.  If it is, and you aren't buying as a sitting tenant, you'll need to take action.

As a 'tax free' investment, your SIPP or SSAS can reclaim the VAT, but it will need to be registered.  This can only occur if your SIPP or SSAS operator allows this.

In any event, you'll need to make provision to pay the VAT, which will be reclaimed at a later date. If you don't have sufficient cash in your SIPP or SSAS to cover this liability, you have a couple of options.

Funding The VAT From Within Your SIPP Or SSAS

You could make a pension contribution, which will attract tax relief.  Once the VAT has been reclaimed, you'll have additional cash to invest within your SIPP or SSAS.

Funding The VAT From Outside Of Your SIPP Or SSAS

If you prefer to keep the money outside of your SIPP or SSAS, you or your business could make an unsecured loan to your SIPP or SSAS for a period of time until the VAT has been reclaimed.

Increase Your Buying Power

If you find a property above your price range, having checked you're not stretching too far and your due diligence indicates the property represents good value for money, there are three things you can do to fund the shortfall.

You Can Borrow

This has been covered above.

You Could Make An Additional Pension Contribution

Providing it's within HMRC limits, it will attract tax relief.

You Could Buy In Conjunction With Others

This might be with other SIPP holders in the form of a Family or Group SIPP, in which case you should also run a comparison with a SSAS.  But you might prefer to jointly purchase the commercial property either yourself, via your business or with a third party investor.

Discover How To Profit From A Property SIPP Or SSAS

To find out if a property SIPP or SSAS is right for you, please get in touch using our contact form.

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As SIPPclub neither advises on, nor arranges, nor recommends specific investments or strategies, we're unable to say whether a SIPP or SSAS or any investment is right for you.  Ultimately, it’s your money and your decision, and you should only proceed once you're satisfied you've undertaken sufficient due diligence.  If you need advice, you should speak to your trusted adviser, or you could find a local adviser from Unbiased.co.uk.  Alternatively, we'd be pleased to introduce to a suitably qualified independent financial adviser.