One of the core ingredients of a SIPP since 1989 has been commercial property, however this avenue has still been fairly underused.
This type of investment should be more popular as it allows real value to be provided to business owners by their advisers in conjunction with accountants and solicitors.
Some of the higher-value SIPPs we have within our own portfolio often result from commercial property ownership, normally leased back to the connected business and these clients can see that property is often a good long-term income producing asset that sits well with a balanced portfolio.
Other than the fantastic tax advantages, consolidating previous pensions and possibly combining with borrowing, could be the difference that allows the purchase of a commercial property which may otherwise be unaffordable for the business. The ownership of the property within the pension would then allow the business owner to benefit from the rent, which they would currently be paying to an unconnected landlord.
What type of property is suitable and on what terms?
The choice and type of commercial property is diverse, but includes traditional commercial properties such as offices, retail, warehouses, industrial units and workshops. Admittedly the changes to borrowing rules in 2006 has made property purchases within pensions more challenging; you can only borrow a maximum of 50% of net assets and this has to incorporate all the associated costs such as VAT.
The rental income needs to be greater than the borrowing repayments and paid at market value, but once the borrowing has been repaid, the pension is left with an attractive unencumbered income producing asset, which is often retained in the pension after the business has been sold to help produce retirement income.
The tax advantages of purchasing a commercial property within a SIPP are significant, with part of the purchase being funded by tax relief on new or previous contributions, and this is an area where the new funding rules introduced in April 2011 has assisted, especially with removal of the anti-forestalling legislation and introduction of carry forward.
The other tax advantage is that any growth is free from capital gains tax and rental income is free of income tax as well as being an allowable business expense for the company. The lump sum death benefits can be paid IHT free, though post crystallisation there can be a tax charge of 55%, if not paid as a charitable lump sum.
The Financial Conduct Authority does not regulate tax advice.
Liquidity needs to be a consideration
Liquidity needs to be a consideration either when it comes to the payment of retirement benefits in a tax-free lump sum or on death. There is potentially less flexibility in owning the company premises within the pension; it is not an asset of the business as does not form part of the balance sheet, and a connected tenant must be treated as if they were unconnected. However, the tax advantages and opportunity to purchase often outweigh these negatives.
Connected party route
Another area of consideration which is currently proving popular is the opportunity of a SIPP purchasing commercial property from a connected party, which then frees up funds for use within their business, though this requires professional input.
True bespoke SIPPs utilising their flexibility and investment powers remain powerful planning tools, and commercial property purchases are a good example as to how they can offer much more than just being a tax-efficient form of saving for retirement.
City Trustees is a specialist pension provider committed and focused on the fully bespoke self-invested pension market, distributing its products exclusively via independent financial advisers, wealth managers and other intermediaries.
City Trustees is a well-established business, which also benefits from the strength of being owned by leading pension provider Mattioli Woods plc. Core to its product offering is a professional and personalised service. For IFAs, City Trustees operates a free technical helpline for support with pension challenges. Tel: 0116 240 8731 or email: email@example.com today.
The all-important small print & risk warnings
Investing in commercial property also involves costs, such as legal fees and stamp duty land tax.
Investment in property is a long term one and at times, markets may prove to be illiquid. It may not therefore be possible to realise an investment at a time of your choosing and any forced sale could produce returns that are considerably below market valuations.