Buying commercial property with a SIPP is a very popular type of investment, particularly for business owners who do own their premises.
This SIPP property purchase guide summarises the disadvantages and advantages of purchasing a commercial property with a SIPP.
What’s a SIPP?
A SIPP is a form of personal pension that enables you to hold a wide range of assets. A SIPP also comes with generous tax rules, which applies to any asset held within it (commercial property included).
The benefits of purchasing a property in a SIPP
One of the main benefits of using a SIPP to purchase a property is for the tax benefits applied to your contributions.
- If you are an individual, you will receive pension tax relief at the marginal rate. This in turn means that if you are a higher rate taxpayer, the Government will contribute to your pension by £20 for every £80 you put in and further reduce your tax bill by a further £20. In effect, it only costs you £60 to receive £100 of benefit.
- If you are an employer, contributions to the pension will be an allowable expense. This means that money paid to a pension will actually reduce your corporation tax liability. You will not pay national insurance on the contribution either.
The benefits of holding commercial property in a SIPP
The SIPP is a tax-efficient wrapper. This can partner itself well where a pension is holding a physical asset such as a commercial property. The 2 main tax benefits are:
- Tax-free growth. This means that when you decide to sell the property, there isn’t any capital gains tax to pay (as opposed to the 18% or 28% tax paid if not held in a pension).
- Tax-free income. This means that rental income is tax-free (rather than the usual 20% or 40% tax that you would pay outside of a pension). Therefore, if your business owns it’s premises, the business could pay rent into the pension, which further reduces the businesses corporation tax liability and no additional tax would be paid on the income by the pension.
Are there any drawbacks?
Whilst holding commercial property in your SIPP can be very tax-efficient, there are some drawbacks. The main ones are around liquidity, restrictions and diversification.
- Selling property just doesn’t happen overnight. So, if you need to get your hands on some cash, and only hold property in your pension, it will take a while.
- If you only hold property, you have got all your eggs in 1 basket. For all but the largest pension funds, a property tends be the majority if not all of the pension funds’ assets. This means that when prices fall, you don’t have anything to offset it.
- While a SIPP provides you with a sizely element of control, it must be remembered that it is the SIPP that actually owns the property. This is to make sure that HMRC guidelines are followed and that you aren’t left with a hefty tax bill. Do you want to change the structure of the building? You will need sign off from your SIPP provider first.
Buying commercial property through a SIPP is not for everyone. It will depend on your circumstances and needs. This is where financial advice is crucial. Before making any important decisions on your pension we strongly urge you to speak with your financial advisor.