Using a Self-Invested Personal Pension (SIPP) to purchase and hold commercial property can be beneficial. However, it is a solution that can seem complex and it may not be the right option for you. It’s also important to note that a SIPP isn’t suitable for everyone. If you have any questions about SIPPs or saving for you retirement, please contact us.
A SIPP is a type of pension that can give you greater control and flexibility. It allows you to choose from a larger selection of investments, including commercial property. Permitted SIPP commercial property could include business premises, factories, retail properties or offices. SIPPs may be suitable for you if you are comfortable making your own investment decisions or want to consolidate several pensions into a single place.
There are essentially two ways business premises can be held in a SIPP. If you or your business already own a property, you can use the equity release model to effectively exchange the pension fund already accumulated for the property so you or your business receive payment from the SIPP and the SIPP becomes the new owner of the property. Alternatively, the funded purchase model allows a pension to purchase a new property using the pension funds, with the property then being placed directly in the SIPP. In either case, it’s possible for the SIPP to borrow additional funds to help purchase the property if needed (see below).
1. Rents received are not liable for Income Tax
The rent paid on the commercial property can really help your pension grow and put you on the right path for the retirement you have been looking forward to. A key benefit is that you will not have to pay Income Tax or Corporation Tax on the rent received. You will need to be mindful of Income Tax when you start making pension withdrawals, but this is often something that is easier to manage. If you are a high earner this benefit can be particularly useful. If your own business occupies the property, the business will also benefit from tax relief on the rent.
2. No Capital Gains Tax will be due on the sale of the property
When selling assets, Capital Gains Tax on the profit you have made may be due. This is often the case when it comes to commercial property. However, profits are free from this tax when business premises are held within your SIPP. This is because any growth in the property’s value belongs to the pension, rather than you or your business. With Capital Gains Tax rates up to 20%, moving commercial property into your SIPP could save you a significant amount and boost your pension savings. If a property you own is bought by the SIPP, there could be capital gains tax due at that point, but not on future growth once held within the SIPP.
3. It could be used to release capital back into the business
There may be times when you need to release capital back into your business to improve cashflow. This is possible if your SIPP purchases your business premises. This can provide you with far more flexibility and a safety net if your business hits roadblocks.
4. You can borrow up to 50% of the SIPP’s value to acquire commercial property
If you have little capital but hope to purchase business premises, pensions can provide an answer. As well as the value of your SIPP fund, you can borrow up to 50% of the total value of your SIPP to complete a purchase. It can be a useful way to acquire the property you need rather than taking out a traditional mortgage on the whole value of the property.
5. It can reduce the amount of Inheritance Tax due
Is your estate likely to owe Inheritance Tax when you pass away? If your assets have a combined value over £325,000, it is worth making an estate plan to ensure as much of your wealth is left to loved ones rather than the taxman. There are many things you can do to reduce the amount of Inheritance Tax your estate is liable for. Although the aim of pensions is to provide retirement funds and an income in retirement, funds placed in pensions re normally outside of your estate which can be an additional advantage of retirement funding. Beneficiaries may have to pay some form of tax when accessing your pension but with careful planning, this can be far below the Inheritance Tax rate.
6. It is not accessible to creditors in the event of personal or business bankruptcy
No one wants to think about becoming bankrupt but unexpected events and circumstances should be planned for. Becoming bankrupt can mean losing all your assets and the financial security you have been saving for in retirement. However, by moving commercial property into a SIPP, it is an asset that is generally safe from creditors. It is a benefit that can provide some security as you grow your business and once you reach retirement.
Whilst these benefits can be useful, it is important to weigh up the cons too. There may be challenges to using this solution, such as implications around the Lifetime Allowance. Adding a commercial property to your SIPP can also change the risk profile of your investments and reduce liquidity. Before proceeding with using a SIPP to hold commercial property, you should look at the decision in the context of your wider financial plans. If you want to explore how a SIPP could align with your aspirations, please get in touch.
Please note: The value of investments and the income derived from them can fall as well as rise. You may not get back what you invest.
The Financial Conduct Authority does not regulate tax advice or estate planning.