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Over the years a proportion of our clients use their pension assets to buy a commercial property.  Why would they do this?

The general benefits are as follows:

  • You do not pay any tax on rental income received into a SIPP (Self Invested Personal Pension)
  • No capital gains tax is paid on disposal of a commercial property from a SIPP
  • For ‘connected tenants’ (a business owner renting their pension’s commercial property to their own business) rent is generally a tax deductible business expense
  • SIPPs generally are not subject to inheritance tax
  • In insolvency the pension assets are normally out of reach of the trustee in bankruptcy

These are fairly standard benefits above; in the current situation a few useful ideas are as follows:

  • If your limited company owns the commercial property sell it to your pension to inject cash into your business to help with cash flow challenges and/or repay loans
  • If you own your own commercial property personally you could sell your property to your SIPP and if your business needs capital, make a Director’s Loan into your company (if viable)
  • By selling the commercial property you own to your SIPP you reduce your personal inheritance tax bill (if applicable)
  • In the past I have had clients sell their commercial property to their business to enable them to change business bank

When we think of commercial property you would normally think of offices, warehouses, industrial units and shops.  In addition, some stranger commercial property could be:

  • Sports stadium
  • Museums
  • Zoos

It is important to buy only commercial property with your pension, buying residential property could incur tax charges of up to 70%.  If you are not sure we can quickly get opinion on whether a property is commercial or residential for pension purposes.

The process for commercial property into a SIPP is as below:

  1. Validate if it is a potential SIPP investment (commercial property)
  2. Acquisition.  This involves good ‘due diligence’
  3. Ongoing management of the property, rent reviews, leases, insurance etc.
  4. Disposal of the property

During the acquisition stage you are likely to need the assistance of a few professionals, your accountant, a solicitor, a surveyor, the SIPP provider and a bank if you need a loan to assist with the purchase.  And obviously your IFA!

Due diligence is thorough and includes a report on title, information on the lease (is it suitable?), legal title, insurance, VAT, a copy of the EPC and search results (environmental searches too).

Loans to assist Purchase

If you do not have enough capital in your pension fund to buy the required commercial property you could borrow funds to purchase it.  Loans are restricted to 50% of the pension fund value.

For example, if you had £240,000.00 in your pension you could borrow a further £120,000.00.  Please note that you must factor in fees etc.

Connected Purchases and Connected Tenants

If you already own the property and you sell it to yourself this is a connected purchase.  You will then rent the property to yourself and you would be a connected tenant.

Connected party transactions must be completed on commercial terms.  You pay a commercial price for the property and you pay a commercial rent.  Normal due diligence is completed.

Investments

Rent paid initially can be used to pay any loan off asap if there was a loan used in the purchase.  Rent can then be invested in standard investment assets in your SIPP.

Investments can be funded by lump sums and on a regular monthly basis.  Building good liquid assets alongside your property assets is good practice.

Fees

In general terms fees for commercial property purchase in a SIPP and ongoing fees are more expensive than a standard property purchase.  This is because it is more complicated.

You also have the additional costs of your SIPP provider and your IFA in comparison with a standard property purchase.  Are the additional fees worth paying?  That depends on your circumstances and objectives.  Please take advice.

Summary

Whilst it is not for everyone buying commercial property with your pension could be useful, particularly now.  Some general benefits are that you take control of your working environment, property maintenance (and hygiene now) and if you have the space you could have a tenant too.

You can also join together with your life partner or business partners to buy commercial property with a few SIPPs.  You would own the property in proportion to your percentage paid.  This can get complex later, particularly at retirement.

Occasionally a SIPP may not be the right pension vehicle for your commercial property purchase.  A few of my clients prefer the additional benefits a SSAS provides (Small Self-Administered Scheme).   We won’t go into the SSAS benefits in this blog.

Retirement options include retaining the property and using the rent paid as part of your retirement income or selling the property.  If you are selling your business and retaining the property in your SIPP, you should also negotiate good long lease terms to the buyer of your business.

Right now, it could be difficult to get a valuation on a property, but business will gradually start returning to normal over the rest of the year – hopefully, a vaccine will speed things up!

Steve Speed

11/05/2020