Investing in commercial property might not be the first thing that springs to mind when you think about your pension. However, with a Self-Invested Personal Pension, or SIPP, you can do just that.
Furthermore, investing in commercial property through a SIPP can allow you to benefit from a range of advantages.
What is a SIPP?
A SIPP is a type of pension which is available to anyone. They are popular among business owners and the self-employed, as they offer a range of advantages and allow the investor to control how the money is invested and thus, the level of risk taken.
Furthermore, a SIPP is defined as a separate legal entity to the owner and their business, so it can be used to hold assets and money without impacting the finances or liabilities of the individual or their company.
What are the advantages of a SIPP?
Holding a commercial property in a SIPP can benefit you in five key areas:
1. Tax-efficient rent
When a tenant pays rent on a commercial property which is held in a SIPP, the money is paid directly into the SIPP rather than to you. As a result, the rent does not count as a form of personal income and thus does not attract an Income Tax charge.
When a property is purchased by a SIPP, rent payments must be made into the SIPP. If you intend for the premises to be used by yourself or your business, you still need to make the required payments. Fortunately, the lack of Income Tax on that rent effectively means you are paying money to your own pension, which is designed to benefit you in retirement.
2. Capital Gains Tax
Selling a property which is held in a SIPP will not trigger a Capital Gains Tax bill. As the property is held in a SIPP, rather than belonging to yourself or your business, any growth in property value belongs to the pension, which is a pension and is therefore not subject to Capital Gains Tax.
3. Borrowing options and liability
If you need excess money to fund the purchase of a commercial property, you could apply for a SIPP loan. This is limited to 50% of the value of the SIPP and is repaid through the rent payment made by the occupant of the property.
Liability for these loans is not held against you or your business, rather the value of the SIPP, or the property itself, will be used as security against any defaults. This means that both your personal and professional finances are protected in the event of repossession.
4. SIPP protection
If you or your business are forced to file for bankruptcy, both the value of your SIPP, and any property held within will not be accessible to creditors. This means you will have back up finances available and reduces one of the biggest risks which can come with owning the property your business operates from.
5. Death benefits
As a SIPP is a pension, the value within can be passed onto beneficiaries as a death benefit and the value is outside of your estate for Inheritance Tax (IHT) purposes. This is especially advantageous, as IHT can lead to loved ones facing tax bills of as much as 40% of the inheritance they have received.
The potential disadvantages of holding property in a SIPP
There are several potential downfalls to consider when thinking about using a SIPP to invest in commercial property. These are:
1. Additional costs: When buying property with a SIPP, you will be required to pay additional fees and charges. While this might be expected, it will mean that the money lost if a property sale falls through is much higher than it would be if you bought the property as an individual, or through your business.
2. Tenancy problems: As it is necessary to make rental payments into the SIPP, property which is rented out to an outside company can leave you at risk of a sudden liquidity crunch; where rent arrears or being unable to find a tenant means that you need to make those rental payments yourself, to avoid defaulting on any SIPP loans you have.
3. Business closure risks: In a similar vein, if your own business operates out of a commercial property held in a SIPP, you could face a double-edged issue if your business goes bust, as it will have a knock-on effect on the stability of your SIPP.
4. Lack of diversity: Concentrating a large portion of your assets into one asset class, and indeed, possibly even a single property can mean that you are putting all your eggs in the same basket. If the property loses value, or something goes wrong, you risk losing value in bulk, rather than on a single part of your investments.
5. Liquidity at retirement: A SIPP is much like any other pension type, in that you can access the money and assets within from the age of 55. However, if your assets are tied up in the ownership of a property, it will take some consideration and planning to determine how you will access the money you need, when you need it. A financial planner will be able to help you with this.
To find out more about SIPPs and to discuss whether it could be the right option for you, please contact Sarah or Bev on 0115 933 8433.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor. The Financial Conduct Authority does not regulate tax advice.
