This is a guest post written by James Randall of I.P.M. SIPP Administration Limited.
Buying a commercial property through your Self-Invested Personal Pension (SIPP) is a popular type of investment, particularly for business owners who own their premises.
This short guide summarises the advantages and disadvantages of purchasing commercial property through your pension.
What’s a SIPP?
A SIPP is a form of personal pension that allows you to hold a wide range of assets. A SIPP comes with generous tax rules, which applies to any asset held within it (commercial property included).
What are the benefits of purchasing a property in a SIPP?
One of the benefits of using a SIPP to purchase a property is for the tax benefits applied to contributions. It works like this:
- If you’re an individual, you’ll receive tax relief at your marginal rate. This means that if you’re a higher rate taxpayer, the Government will credit your pension by £20 for every £80 you put in and reduce your tax bill by a further £20. Effectively, it only costs you £60 to receive £100 of benefit.
- If you’re an employer, contributions to a pension will be an allowable expense. This means that money contributed to a pension will reduce your corporation tax liability. You won’t pay national insurance on the contribution either.
What are the benefits of holding commercial property in a SIPP?
The SIPP is a tax-efficient wrapper. This can lend itself well where a pension is holding an asset such as a commercial property. The two main tax benefits are:
- Tax-free growth. This means that when you come to sell the property, there’s no capital gains tax to pay (rather than the 18% or 28% tax paid if not held in a pension).
- Tax-free income. This means that any rental income is tax-free (rather than the 20% or 40% tax that you pay outside of a pension). So, if your business owns the premises, the business could pay rent to the pension, which reduces the businesses corporation tax liability and no tax would be paid on the income by the pension.
What about the drawbacks?
Although holding commercial property in your SIPP can be very tax-efficient, there are some notable drawbacks. The main drawbacks are around liquidity, diversification and restrictions.
- Liquidity. Selling a property doesn’t happen overnight. So if you need to get your hands on some money, and only hold property in your pension, it’s going to take a while.
- Diversification. If you only hold property, you’ve got all your eggs in one basket. For all but the largest pension funds, a property will usually be the majority if not all of the pension funds’ assets. This means that when prices fall, you’ve got nothing to offset it.
- Restrictions. While a SIPP provides you with a large element of control it must be remembered that it is the SIPP that owns the property. This is to ensure that the HMRC guidelines are followed so that you aren’t left with a nasty tax bill. Want to change the structure of the building? You’ll need sign off from your SIPP provider first.
The bottom line
Buying a commercial property through a SIPP is not going to be for everyone. As always, it will depend on their circumstances and needs. This is where financial advice is important. Before making any decisions on your pension we strongly recommend you speak with your financial adviser.
If you want to know more about the benefits, pitfalls and practicalities of buying commercial property through your SIPP, drop me a line.
All the best,
James Mackay, Independent Financial Adviser in Bristol
I.P.M. SIPP Administration Limited (IPM) is authorised by the Financial Conduct Authority to provide self-invested personal pensions only. IPM cannot provide financial advice. Therefore IPM strongly recommends that you speak with an independent financial adviser before making any decisions regarding your pension benefits. The content in this document should be received as information only and not as financial advice. All information is correct as at the date of issue but subject to change.