Woodruff Financial Planning blog

Self-invested personal pensions (or SIPPs) can offer property investors a tax-efficient way of holding commercial property. There are many benefits to this approach, but there are also quite a few limitations. Therefore, you should only enter into this kind of arrangement with specialist advice. This post aims to give you some of the main pros and cons of owning property through a SIPP. 

What is a SIPP?
A SIPP is a specialist type of registered personal pension, which allows you a very wide investment choice. One of the permitted investments is commercial property.By owning a property through a SIPP you can avoid tax on the income and sale of the property, although there are limitations over the control of the property once it is owned by the pension fund.

The process of owning a property through a SIPP
A SIPP can buy and manage any commercial property as an asset of the pension scheme. Once bought, the property is actually owned by the scheme itself, which does place restrictions over the property. In particular, once in the pensions arena, the money cannot be transferred out again. This means that you would need to be aware of the general restrictions on pensions, as well as the financial and age limits which apply.

Once owned, the rent paid would be paid directly to the SIPP, and any loan repayments would also be paid by the SIPP. Any growth in the value of the property would be tax-free, as would income. General maintenance costs and other fees would be paid out of the income or assets of the pension fund.

Ultimately, as the owner of the pension fund, you would benefit through tax-free growth until you come to take the benefits from the pension fund. 

What kind of property can be owned through a SIPP?
A SIPP can only contain commercial property. This includes freehold or leasehold land, and can be overseas. Commercial property can include: 

• Shops & offices
• Warehouses & business units
• Hotels
• Nursing homes
• Pubs
• Farmland or forestry
• Development land

Usually, any property which has any residential component will not be allowable. 

Who uses SIPPs to invest in property?

• Property investors & developers
• Business owners looking to buy their commercial premises

Often, investors will seek to utilise existing pension funds held within other pensions to purchase a property. We work with clients to help them to consolidate older pension funds to form one larger pot which can be used to buy a property. 

This can also be done with new contributions, which would attract tax relief in the usual way. 

For personal contributions, for every £100 invested into the pension plan, £25 will be added as tax relief; for higher rate tax payers a further £25 can then be reclaimed through your tax return. For company contributions, these can be offset against corporation tax. 

Fees
A SIPP provider will charge various fees, depending on their charging model. You should expect to pay fees relating to: 

• The acquisition of the property with a mortgage – perhaps £1,500, depending on the work involved
• Ongoing management of the SIPP – perhaps £700pa
• Valuation, legal and lenders’ fees depending on your purchase method.

Tax
A SIPP will purchase a property just like with any other transaction. Therefore you would need to pay Stamp Duty and Land Registry fees in the normal way. Some purchases may be liable to VAT. 

Borrowing to fund the purchase
A SIPP can borrow against the scheme assets to buy a commercial property. The maximum allowed would be 50% of the net scheme assets, less any existing borrowing. It is also possible to borrow to develop land purchased by the SIPP. 

You would need to find a commercial bank which would be prepared to lend to the SIPP, although this is common practice. 

Joint purchases
You may pool together with other SIPP investors to allow a property purchase, although there can be practical issues to resolve in this scenario. 

For example, careful consideration needs to be made as to what happens if one of the investors dies or wishes to realise their investment. This can be dealt with in some form of co-ownership agreement. 

The percentage of ownership can be unequal, but care should be taken where one owner borrows while another does not, as this puts the latter at greater risk to their fund. 

How we can help
We can help you to examine the market to find the right SIPP for your needs. We can then help you to source the appropriate lenders and facilitate the purchase of the commercial property. 

Pensions are a very complex area, so it is vital that you undertake any transaction with the benefit of financial advice. 

Download this post as a factsheet.

One of the unique pitfalls of financial planning is suddenly coming into money.  This might affect you if you fall into the following categories:

• Sale of a business
• Inheritance
• Divorce
• Critical illness
• Windfalls (e.g. lottery win)
• Ultimate high earners

It may surprise you to think of it, but sudden wealth can be negative as well as positive.  Some commentators have described this as ‘affluenza’ as the responsibility of the extra wealth can lead people to suffer from stress as a result of managing the assets.

Click here to download our factsheet on sudden wealth.

Unsurprisingly, we can help.  We have a service which directly resolves all the issues people face when they come into money – the Portfolio Management Service.

If so, you need to be aware that the minimum age for taking a pension will change this year.  At the moment, if you want to retire from your scheme, you can do so from age 50.  However, from 6th April 2010 this will rise to age 55.  This means if you are considering retiring early, or want to release some tax free cash from your pension, you should start the process now.  Pension decisions can be complicated and changes can take some weeks to put into place.

Contact us if this is an issue for you.