Using a SIPP or SSAS to invest in commercial property
Holding commercial property in a Self-Invested Personal Pension (SIPP) or Small Self-Administered Scheme (SSAS) remains as popular as ever with SME business owners and individual property investors whose objectives may typically include:
- Accessing capital to enable a purchase to take place
- Releasing equity from a property already owned personally or by the business
- Holding property within the tax efficient environment of a pension scheme
Whatever the objective there are many benefits of using a SIPP or SSAS to purchase commercial property but also some disadvantages. Here we explore some of the reasons for and against buying property in a SIPP or SSAS.
Access to Capital
A primary reason for buying property in a SIPP or SSAS is simply to enable the purchase to happen. Business owners seeking to purchase business premises may not have sufficient liquid capital available in their business or personally, or be able to raise commercial finance, but they may have built up substantial pension funds. Bringing the pension funds into play might therefore enable a purchase to take place where it otherwise might not happen.
It is also worth noting that, to assist with the purchase, a SIPP or SSAS can itself borrow from a commercial lender or from a connected party. The borrowing is however limited by pension legislation to 50% of the net asset value of the SIPP or SSAS.
Connected party transactions
A SIPP or SSAS can not only purchase property from a third party but also property already owned by the members company, the members personally or other connected party. Any connected party transaction must however take place at the open market value, which means that an independent valuation of the property will be required.
The seller will of course benefit from an immediate release of any equity the held in the property however, if they have made a capital gain, they may have a tax liability to settle. Once the property is the SIPP/SSAS the tax advantages described below will apply, so in many circumstances a connected party sale of property to a SIPP/SSAS can be highly beneficial in the longer term and offset any immediate tax liability that might apply.
Holding commercial property in a SIPP or SSAS carries a number of tax benefits:
- Rental income received by the SIPP/SSAS accumulates free from tax.
- Rent paid to a SIPP or SSAS is a deductible business expense and can therefore potentially reduce the corporation or income tax liability of the tenant business.
- Any growth in the capital value of the property held in a SIPP/SSAS is free from Capital Gains Tax.
- Assets held in a SIPP/SSAS are generally outside of the member’s estate for inheritance tax purposes.
- Assets held in a SIPP/SSAS are generally out of reach of creditors in the event of the failure of the members business or the member becoming personally bankrupt.
In some scenarios the tax benefits can themselves be the deciding factor on whether to hold property inside or outside a pension scheme.
Purchase of property across a number of SIPP/SSAS or jointly between a SIPP/SSAS and the members or members company is permitted although not all SIPP/SSAS trustees offer this as an option.
Disadvantages of buying through a SIPP or SSAS
Of course holding property in a SIPP or SSAS is not without disadvantages. These include (but are not limited to):
- Borrowing to assist with the purchase is limited to 50% of the net asset value of the pension fund. For example if the net value of the pension fund is £200,000 (and there is no existing borrowing) the pension can borrow £100,000 and fund a purchase of £300,000 including costs. In terms of loan to value (LTV) this would equate to around 33% LTV whereas if buying the property outside a pension scheme a LTV of 60% or more might be achievable.
- Property can be an illiquid asset and difficult to realise should the members need to sell the property to draw pension benefits such as a pension commencement lump sum.
- If the members business needs to raise commercial finance, property held in the pension scheme cannot be used as security for loans to the members business. Holding the business property in a SIPP/SSAS can therefore limit the ability to raise commercial finance for the business.
Choosing the right SIPP/SSAS trustee for your property purchase
Whilst the fees that the SIPP/SSAS trustee will charge for their services are an important consideration it’s equally important that the service provided is flexible enough to meet your immediate and potential future requirements. A flexible service offering will include features such as:
- Wide range of property permitted including freehold or long leasehold
- Joint purchase between multiple SIPPs or SIPP and SSAS
- Joint purchase between a SIPP/SSAS and the member personally or the members company
- Purchase/sale from/to connected parties
- Connected party loans to the SIPP/SSAS
- Free choice of solicitor and property valuer
- VAT registration and returns service where the property is opted for VAT
Westerby The Pension Specialist
When deciding whether to purchase property in a SIPP or SSAS, and how to fund it, there are many options to consider and it can be challenging to decide which is right.
We can’t advise which is best – our role is to assist financial advisers and clients to make the correct decision by sharing our experience and technical expertise in this highly specialised and complex area of pension planning.
We therefore, encourage you to get in touch to discuss your property scenario and objectives. Our new business consultants will be glad to assist.
Get in touch
For more information about a SIPP or SSAS property solution that’s right for you and your business, get in touch using the details on our contact page.
The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice.
All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.
The information provided is not to be considered financial advice, Westerby The Pension Specialist is not authorised to give financial advice and we strongly recommend you seek Independent Financial advice for your financial planning needs.