Whether you want to buy a property for your business to occupy, or as an investment with it being rented to a third party, there are a number of steps you need to take to successfully complete the purchase.
Buying a property in a SIPP can be a complex transaction and we would always recommend advice is taken, but if you are considering this option it’s a good idea to know the stages you will have to go through.
We are experienced in this area and so thought we would put our knowledge to good use by writing this step by step guide.
Step 1: Review your existing pensions
The first thing to do is look at your existing pension plans, providers should be contacted and valuations requested. After all if you want to buy a building for £200,000 and only have £20,000 in your pension you will have to think again!
The existing plans should also be checked for guarantees which will be lost if they are transferred to a SIPP.
Some Personal Pension Plans, although fewer and fewer these days, come with guaranteed growth rates or Guaranteed Annuity Rates (GARs), think carefully about whether you are prepared to give these up in favor of buying a property. The same applies to defined benefit pensions, which are often known as final salary schemes.
Advice should be taken before valuable benefits in these types of plan are given up.
Step 2: Plan
Sit down and think about what you are trying to achieve, do you want your business to occupy the property and pay rent to your SIPP, or will you need to find a tenant?
Think whether your business can afford to pay the rent, or whether your pension will have surplus funds to meet costs if the property is empty and a tenant cannot be found. When the property needs work, how will you pay for this?
How much do you have in your pension? Is this going to buy you the type of property that you want?
Remember that a SIPP can also borrow money. If you think you will need a bank to help out with a loan, now is the time to make some tentative enquiries to satisfy yourself that funding will be available.
In short, you and your adviser should plan everything as far as it is possible. Effective planning at this stage will prevent mistakes being made later on in the process.
Step 3: Identify a suitable property and agree a purchase price
This works in a very similar way to buying a property personally; a couple of important points though should be remembered.
Firstly, if you are buying the property from a ‘connected party’ for example yourself, your business or your spouse, then it must be bought for the ‘market rate’, which cannot be discounted in any way.
Secondly, if you buy at auction remember that as soon as the hammer falls you are legally obliged to buy the property. It therefore makes sense to confirm beforehand that your SIPP can definitely buy the property in question and that any finance you will need is in place. Specialist SIPP providers and IFAs are used to dealing with purchases at auction and can help you to make sure yours is completed successfully.
Step 4: If necessary source a lender
SIPPs can borrow money to help finance the purchase of a property and most commercial lenders are used to dealing with such transactions.
A SIPP can borrow up to 50% of its net asset value and the property will be used as security.
Banks underwrite SIPP property purchases in a very similar way to if you or your business were buying it. If your own business is occupying the property the bank will need to be convinced that your company will be able to make rental payments, if you are buying it to let out to a third party, there will need to be sufficient demand for such a property.
Step 5: Identify the right SIPP
Not every SIPP allows property purchase, however you will find plenty to choose from who do.
Each SIPP provider will levy their charges in different ways. Most will have a set up fee, a property purchase fee and an annual fee. Additional costs may be payable dependent on the type of property you buy; if you take advice from an IFA they will also make a charge.
Don’t just focus on costs though, there are many other things to consider. Do you need online functionality? Are you confident that your chosen SIPP provider has the necessary expertise to complete the transaction? How financial stable is your chosen SIPP provider? How good are their service levels? These are just a few of the things to think about, there will of course be others which will vary from purchase to purchase.
Step 6: Arrange for transfer of funds
If you are moving money from other pensions into a SIPP so that you can purchase a property, this now needs to be completed.
If you are making a new pension contribution then this should also be done now.
Step 7: Choose a Solicitor
A Solicitor needs to oversee the purchase of a property by a SIPP, much the same way as is necessary when you or your business buys a property.
Some SIPP providers will allow you to use a Solicitor of your choosing, others work from a panel. Before instructing a Solicitor make sure that they are acceptable to your SIPP provider.
The SIPP can pay the Solicitors fees as well as any other legal expenses you may have to pay.
Step 8: Complete transaction
Once all the legal requirements have been met and funds transferred from existing pensions then you are in a position to complete your purchase, this is much the same as if you were to buy the property yourself.
Funds will be sent from the SIPP to the Solicitor, if your SIPP is borrowing money this will also be sent to your Solicitor. Once in receipt of the funds your Solicitor will send these to the vendor and the property will belong to the SIPP.
Step 9: Set up leases
Once your SIPP has completed the purchase you still have some work to do.
If your business is the tenant then a lease will need to be put in place, this can be drawn up by the same Solicitor who arranged the purchase. The rent needs to be set at a market rate, which the SIPP provider may want to be independently verified. If the SIPP has borrowed money to help fund the purchase the lender may want certain provisions to be put in the lease.
If you plan to find a tenant for the property if you have not done so already now is the time to start marketing it. Again once you find a tenant a lease needs to be put in place.
Buying a property in a SIPP can be complex and we would always suggest that independent advice is taken before a transaction is started.
Not only can an adviser confirm that you are not losing valuable benefits by transferring existing schemes, he or she can also help in choosing the right SIPP and generally working on your behalf to ensure that the purchase is completed successfully and on time.