We’ve recently seen a rise in the number of enquiries we get from people looking to buy commercial property in a SIPP. We therefore asked the Investment Sense SIPP team (pictured below) to come up with a few hints and tips to help you make the right decisions.
1. No residential property
We still get the occasional enquiry from people wanting to put residential property, usually a holiday home, in a SIPP.
Residential property, whether it is for you to live in, a buy to let property or a holiday home, is not allowed in a SIPP. There are rare occasions when a residential element to a property is allowable where it is necessary to provide living accommodation for staff; however this cannot be used by beneficiaries of the property.
In short, except in a very few specific cases, residential property, whether it is here in the UK or abroad is not an allowable SIPP investment.
If you don’t have enough money in your SIPP to buy the property of your choice, or indeed you don’t want to use all the cash available, your SIPP can borrow money.
A SIPP can borrow up to 50% of its value and most banks are geared up to lend to SIPPs.
Despite the scare stories we read in the press about the unwillingness of banks to lend, we have found them accommodating when it comes to SIPP lending. Perhaps one reason is that the loan to value, a key criteria in getting a positive decision, is always low due to the maximum borrowing levels dictated by the SIPP rules .
If your business it to be the tenant, the bank will want to satisfy themselves that your company has a stable trading history and sufficient cashflow to meet the rental payments.
If you are buying for a third party to occupy, you might find the range of lenders slightly reduced and those who are interested would ideally like to see a sitting tenant or at the very least, a building which is easily letable.
3. Remember rules for owner occupiers
Buying a commercial property in a SIPP is not a way of your business finding cheap premises.
Everything needs to be done on a commercial basis; that means your business will have to pay a market rent and sign a lease, which can include provisions such as rent free periods, just as a third party tenant would have to do.
4. It’s all in the preparation
If you are considering buying a property in a SIPP preparation is key, especially if you are planning to buy at auction.
Finding the right SIPP provider and transferring pensions can be tricky. We would always recommend that advice is taken to avoid mistakes and in some cases make sure valuable guarantees are not lost.
In the time leading up to buying your property, we would suggest avoiding any risky investments, which might fall in value and reduce your buying power. There are specific deposit accounts for SIPPs and we would suggest using one of these to hold the cash until the time comes to buy.
In summary, preparation is key; we would always suggest you take advice to make sure you get the right SIPP, avoid costly mistakes with transfers and then don’t take too many risks with the money.
5. Consider a SSAS?
SIPPs tend to grab the headlines, but they are not the only type of self invested pension, a SSAS (Small Self Administered Scheme) also can have a place.
A SIPP is an individual arrangement, whereas as a SSAS is a group scheme, generally with multiple members. A SSAS potentially has a couple of advantages over a SIPP.
Firstly, where there are a number of SIPPs coming together to buy a property, often known as a Family SIPP, the overall costs may work out cheaper with a SSAS. Secondly, the paperwork can be less onerous with a SSAS, which is one scheme compared to the multiple arrangements needed under a Family SIPP. Finally, if required and suitable security is available, a SSAS can lend money back to the sponsoring employer.
There are potential downsides to the SSAS, for example all members usually need to be trustees, something which is not the case with a SIPP.
In summary, if you are part of a group of SIPPs looking to buy a property, a SSAS should be considered as an alternative to a Family SIPP.
6. Remember VAT!
VAT often catches people out.
When you make your offer check whether the property is subject to VAT; if it is and you are not buying as a sitting tenant, you will need to take action.
Firstly, to reclaim the VAT the SIPP will need to be registered for VAT, be careful here to choose a SIPP provider who allows this.
Next you will need to make provision to pay the VAT, which of course will be reclaimed. We find some people have sufficient spare capital in their SIPP to pay the VAT and await the refund, others though do not.
Those people who don’t have sufficient spare capital in their SIPP have a couple of options.
They could make a pension contribution, which will of course attract tax relief, although once the VAT has been reclaimed this will mean that the SIPP has additional spare cash, which you may prefer to have outside of a pension arrangement. If this is the case, you or your business could make an unsecured loan to your SIPP for a period of time until the VAT has been reclaimed.
Whatever route you choose, remember to check about the VAT, we have seen property purchases delayed because the buyer forget to look into it.
7. Increase your buying power
Many people looking for property spot something which is “perfect for them” but is just outside the price range, if this happens to you there are things you can do.
First of all, double check you are not stretching yourself too far and that the property does indeed represent value for money, once you have confirmed that, you can turn your attention to how you fund any shortfall.
The first option is often to make an additional pension contribution, which, providing it is within HMRC limits, will attract tax relief. Contributions which will attract tax relief are now limited to £50,000 in a single tax year, although if you need to pay more in it is possible that carry forward could be used and changing pension input periods can also help. Both of these areas are complex and advice should be taken to ensure you get it right; our advisers are experienced in dealing with both carry forward and the changing of pension in put periods.
If you don’t want to make additional contributions, you could always buy with another SIPP, under what is often called a Family SIPP arrangement, or alternatively your SIPP could buy the property with yourself or your business.
In summary, if you find a property you want to buy which is outside your planned budget, yet still affordable, speak to one of our advisers, they may just have an answer for you.
Buying a property in a SIPP can be a daunting process, especially if you have not done it before; this is where we come in.
Our experienced team of SIPP advisers are here to help, advise and guide you through the minefield, making sure you make the right decisions along the way.
If you are considering buying a property in a SIPP, would like to know more, or have a question you would like answering, call the SIPP team today on 0115 933 8433, and ask for Bev Stoves, Jessica McGowan or Sarah McCarthy.