Using a Self-Invested Personal Pension (SIPP) to purchase and hold commercial property can be beneficial. But it’s a solution that can seem complex and it may not be the right option for you.
A SIPP is a type of pension that can give you greater control and flexibility. It allows you to choose from a larger selection of investments, including commercial property. Permitted SIPP commercial property could include business premises, factories, retail properties or offices. SIPPs may be suitable for you if you’re comfortable making your own investment decisions or want to consolidate several pensions into a single place.
There are essentially two ways business premises can be held in a SIPP. If you already own a property, you can use the equity release model to effectively exchange the pension fund already accumulated for the property. Alternatively, the funded purchase model allows a pension to purchase property using the pension funds, with the property then being placed directly in the SIPP.
So, why is it an option that you should consider?
1. Rents received aren’t liable for Income Tax
The rent paid on the commercial property can really help your pension grow and put you on the right path for the retirement you’ve been looking forward to. A key benefit is that you won’t have to pay Income Tax on the rent received. You will need to be mindful of Income Tax when you start making pension withdrawals but this is often something that’s easier to manage. If you’re a high earner this benefit can be particularly useful. You’ll also benefit from tax relief on the rent.
2. No Capital Gains Tax will be due on the sale of the property
When selling assets, Capital Gains Tax on the profit you’ve made may be due. This is often the case when it comes to commercial property. However, profits are free from this tax when business premises are held within your SIPP. This is because any growth in the property’s value belongs to the pension, rather than you or your business. With Capital Gains Tax rates up to 20%, moving commercial property into your SIPP could save you a significant amount and boost your pension savings.
3. It could be used to release capital back into the business
There may be times when you need to release capital back into your business to improve cashflow. This is possible when a commercial property is held in a SIPP. It can provide you with far more flexibility and a safety net if your business hits roadblocks.
4. You can borrow up to 50% of the SIPPs value to acquire commercial property
If you have little capital but hope to purchase business premises, pensions can provide an answer. You can borrow up to 50% of the total value of your SIPP to complete a purchase. It can be a useful way to acquire the property you need rather than taking out a traditional mortgage on the whole value of the property.
5. It can reduce the amount of Inheritance Tax due
Is your estate likely to owe Inheritance Tax when you pass away? If your assets have a combined value over £325,000, it’s worth making an estate plan to ensure as much of your wealth is left to loved ones rather than the taxman. There are many things you can do to reduce the amount of Inheritance Tax your estate is liable for. One of them is moving assets into your pension. For Inheritance Tax purposes, your pension is usually considered outside of your estate. Beneficiaries may have to pay some form of tax when accessing your pension but with careful planning, this can be far below the Inheritance Tax rate.
6. It’s not accessible to creditors in the event of personal or business bankruptcy
No one wants to think about becoming bankrupt but unexpected events and circumstances should be planned for. Becoming bankrupt can mean losing all your assets and the financial security you’ve been saving for in retirement. However, by moving commercial property into a SIPP, it’s an asset that is safe from creditors. It’s a benefit that can provide some security as you grow your business and once you reach retirement.
Whilst these benefits can be useful, it’s important to weigh up the cons too. There may be challenges to using this solution, such as implications around the Lifetime Allowance. Adding a commercial property to your SIPP can also change the risk profile of your investments. Before proceeding with using a SIPP to hold commercial property, you should look at the decision in the context of your wider financial plans. If you want to explore how a SIPP could align with your aspirations, please get in touch.
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