Using A SIPP To Buy Commercial Property
It can be highly tax-efficient
to buy commercial property
through a pension fund...
This is increasingly popular amongst small business owners who choose to purchase their business premises through their pension scheme to take advantage of the tax breaks that are on offer.
Self-administered pension schemes are used as a way of purchasing a property. There are two types of self-administered schemes:
- Self-invested personal pension plans (SIPPS) – for individuals
- Small self-administered schemes (SSAS) – for companies
Individuals have the ability to use SIPPs to choose where their pension savings are invested, rather than leaving the decision to a pension fund manager. SIPPs offer a much wider range of investments to choose from, including investment in commercial property which is not available under a personal pension plan.
Contributions can be paid in by the individual, employer or both which will receive tax relief on top. When property is purchased through the SIPP, it is the trustees who are the legal owner of the property. You may only borrow up to 50% of the value of the property, this can be useful if the pension fund isn’t large enough to cover the full cost.
It’s important to remember that it is not possible to draw from a SIPP personally before the age of 55.
Investing in commercial property through your SIPP offers many advantages that include:
- Tax relief on contributions paid into your SIPP
- Exemption from capital gains tax when the property is sold
- Exemption from income tax on any rental payments
- Increased cash flow if property is purchased from you or your company
- The property will form an asset of your SIPP and therefore your creditors will not have access to it
- On the member’s death there normally won’t be an inheritance tax liability as the property is an asset of the scheme
What Type of Property
A SIPP can own a commercial property outright, but when investing in a residential property, this can only be done as a small part-owner where the property is not for personal use and via a genuinely diverse commercial vehicle, such as a real estate investment trust (REIT). The restrictions on residential property mean that in most cases SIPP property investment is restricted to commercial property.
Permitted investments include business premises, factories, offices, shops etc. As well as hotels, care homes and prisons.
There are times when a commercial property can have a residential element, for example a shop that has a flat above it. As long as no member of the SIPP is living in the flat above the shop it can all be considered as a commercial property.
SIPP Property Purchase Case Study
Mr and Mrs Chambers run a successful business ‘A Piece of Paradise’ that offers outdoor space design and build services. The company own the business unit that they work from, it is used for storage and as offices. The couple have built up the value of their SIPPs over the last few years with the aim to use them to purchase the unit from the company. The benefits of this will be that it will provide additional cash flow for business expansion, with the SIPPs owning the property should the business ever fold this asset will be protected from creditors and any future growth in the value of the unit will not be subject to Capital Gains Tax on eventual sale.
The unit was originally purchased 17 years ago for £113,538, the current value is £200,000. This will create a capital gains tax liability on the sale of the unit to the pension schemes, which the company will be taxed on at the usual rates along with other trading profits for the year.
Mr Chambers completed the Property Purchase Questionnaire and this was sent to their pension company on 18 June, the official valuation was carried out, the SIPP company and clients appointed their solicitors. Initially there was a small hiccup because of the age of the property there was no Energy Performance Certificate (EPC) so this had to be dealt with first, happily there was no problem.
This purchase was pretty straight forward and there were no issues, a little time was spent ensuring that the terms of the lease were appropriate. It can get quite confusing when it is the business selling the property to the SIPP, which is owned by the company directors, who will also be the new tenants. Everything has to be done as if the parties are unconnected i.e. as if the tenants are new to the property. This is why the company directors needed to instruct their own solicitor. Ultimately the deal was completed on 26 November, therefore just over 5 months.
As for the costs involved:
| Cost of purchase | £ 200,000 |
| Valuation | £ 1,000 |
| SIPP legal costs | £ 2,769 |
| Stamp duty | £ 1,000 |
| Land registry and insurance | £ 170 |
| Our fees | £ 2,500 |
Total costs £206,439
A Piece of Paradise
On top of these are the capital gains tax and own solicitors fees, these costs are settled by the company.
Buying property through a SIPP is never going to be a speedy or inexpensive transaction, however, when it is done well the long term benefits are excellent.
- A Piece of Paradise had an inflow of £200,000 to their company bank account.
- The unit is protected from creditors, should the company go into liquidation and remains an asset that the pension can rent to new tenants.
- The company will now pay rent to the pension schemes, helping to reduce profits that are liable to corporation tax.
- Rental income does not count towards the annual pension contribution allowance, so the company can continue to maximise its contributions on behalf of the directors, another profit reducing tactic.
- If the directors retire their pension schemes could rent the property to a different tenant, giving them pension income.
- When the property is sold the pension schemes will not be liable to capital gains tax on the increase in value of the unit.
This case study is based on a real client, although names have been changed for privacy and the process has been simplified. It should give you an idea of the timescale and costs involved in this type of transaction.
If you think that your circumstances are right and it is something that you would like to discover more about, either give the office a call or fill in the contact form on this page.
Win-Win
The above case study shows buying commercial premises through a SIPP can be a win-win situation. This is partly because of the tax benefits available and partly because any rent paid for commercial property is not lost to a third party. It’s highly advisable that professional advice is sought if contemplating an investment such as this.
If you have any questions or queries on this topic, please feel free to leave a comment or contact us here.