Adding commercial property to your SIPP can help expand its value. But complex regulations make it essential to have the right information before doing so, writes Paul Dent of Lewis Golden
Using your self-invested personal pension (SIPP) to invest in commercial property has a number of attractions:
■ tax relief on contributions to help fund the purchase;
■ no tax on rental income or capital gains;
■ potential inheritance tax protection; and
■ possible improved cash flow if the property is currently owned by you or your business.
However, before undertaking such a complex transaction there are a number of considerations.
Plan ahead
A lot of preparation is required before making any purchase. It is vital that all necessary steps be identified and implemented. If certain elements are not completed in time, there may be delays or the transaction may not be able to proceed. Where necessary, seek the advice of professional advisers.
SIPP provider
You will need to verify whether your current SIPP provider is able and willing to accept commercial property as an investment, because only a relatively small number of providers have the necessary capability. You may need to consider transferring your existing SIPP to an alternative provider, which may require formal regulated advice.
If you have or find a suitable provider, you should discuss your plans with them. Many SIPP providers have expertise in this area and can provide valuable guidance, with access to in-house or approved specialists.
No residential property
A prime hazard to avoid is residential property. If a SIPP acquires a residential property:
■ the investment is considered an unauthorised payment, resulting in a tax charge of up to 55% for the member; and
■ a scheme sanction charge of up to 40% on the rental income and subsequent gains is payable.
A residential property in this context is a building or structure that is used or is suitable for use as a dwelling, which can include related land and buildings. An unoccupied property that is intended to be converted to commercial use can still be ineligible if it is suitable for use as a residential property and was used as such when last occupied.
Some types of residential properties are exempt and can be held in a SIPP. These are
■ children’s homes or institutions providing residential accommodation for children (eg boarding school);
■ halls of residence for students, but not self-contained student flats or houses;
■ nursing homes;
■ hospitals and hospices; and
■ prisons and other detention facilities.
Accommodation provided for an employee where it is a condition of the employment, such as an on-site caretaker or warden, may also qualify.
Where you have a mixed-use property, the entire property can be considered residential and invalid unless any residential parts are exempt or can be carved out and separated from the commercial elements.
Always verify what exactly is to be held in the SIPP to avoid the punitive tax charges. HM Revenue & Customs states that it takes a common-sense view of these matters, but if you have any doubts seek professional guidance.
Freehold versus Leasehold
Most interests in commercial property qualify, but additional due diligence is required for leasehold property arrangements to ensure they do not inadvertently invalidate the eligibility of the property.
VAT
If VAT is due on the property, the SIPP may need to register for VAT, particularly if it is possible there would be development work on which VAT is to be reclaimed.
VAT is a complex area of taxation and you should seek specialist professional advice.
Financing the purchase
The purchase needs to be financed in full, including costs, fees, commissions and stamp duty land tax. This may require:
■ realising existing investments within the SIPP;
■ additional contributions by the member; subject to available annual allowances; and
■ transfers from other schemes, which may require formal regulated advice.
A SIPP can also borrow up to 50% of the net market value of its existing assets at the date of purchase. The borrowing must be secured against the property and, where necessary, other assets that the SIPP holds.
Obviously any rental income must be sufficient to meet the cost of the finance and any associated fees. There may also be other costs, such as insurance and professional management fees, that will require sufficient liquidity.
Sole or joint ownership
If the SIPP is unable to acquire the entire property, joint acquisition and ownership may be a sensible alternative. There is no requirement that each owner has an equal share, but consideration will need to be given to future circumstances such as if one of the other owners wishes to sell.
Some SIPP providers will pool funds from a number of plans to facilitate a joint purchase, but there is no requirement that the other owners all be SIPPs.
Connected parties
If the property is owned by you, your business or a connected party, all transactions, including future rental income, must be on an arm’s length commercial basis – that is, the property must be purchased and future rent must be charged at open market value. This will require the involvement of professional valuers and agents, with regular reviews, otherwise a discounted purchase or rent could result in adverse tax charges.
Liquidity
Ultimately the purpose of a SIPP is to provide security in retirement. At some point cash will be needed to pay benefits to the member, which may require the sale of the property. As always, plan ahead to avoid a forced sale in an unfavourable market.
Paul Dent is a partner at accountant Lewis Golden
This article appears in the latest edition of the Property Auction Buyers’ Guide, published by EG on 7 October. For free access to more content for private investors, click here to register for your free digital edition of the guide.
