Buying commercial property through SIPPs can be fantastic lifestyle financial planning in the right circumstances.
The idea sounds great and that is because it is. Why not pay rent you were going to pay anyway into your pension rather than to someone you don’t know?
Buying your commercial premises with your own SIPP, and then paying rent into your pension seems almost too good to be true. Surely there is a catch? In reality, it is not only legal but also incredibly efficient.
So how does it work?
The process is pretty straightforward, although it’s important to choose the right SIPP provider to partner with through the journey. we’ll look at how to choose the right provider in a subsequent blog.
If you are buying your commercial property from an external vendor in this way, it really does stack up. Your company knows it has a landlord it understands inside out, taking real risk out of the equation. With your SIPP investor hat on, you get access to a commercial property investment opportunity involving a tenant you can trust and whose intentions and creditworthiness it understands 100 per cent.
If you already own the business’s commercial premises but need to raise cash for whatever reason, capital can be freed from the pension without having to fully sell up and lose control of the property. The SIPP can buy the property with 100 per cent cash or with a 50 per cent loan facility, at a commercial price of course, giving the business access to capital to develop the business. The real beauty of this opportunity is, you don’t have to buy the whole premises. The SIPP can purchase just as much of the property as it can afford, and own it on a tenants-in-common basis with the business. There are many advisers who are not aware of this possibility.
Perhaps you simply want to invest in a commercial property for its own sake, without using it for your own business. With so much uncertainty in investment markets at present, giving a certain part of your portfolio over to a commercial property you know and understand might be an attractive proposition. Factor in the ability to gear potential growth with 50 per cent borrowing at historic low interest rates, and the reasons for going down the commercial property in SIPPs route start to stack up.
What are the tax benefits?
The tax benefits are pretty simple. If the property grows in value while in the SIPP, no capital gains tax liability is raised. If your business is using the premises then the rent it pays is an allowable business expense. Income is received into the SIPP tax-free, and if you die there will be no inheritance tax liability on the property held in the SIPP, which is in stark contrast to the 50 per cent maximum business property relief available if the property is owned by the business outside a SIPP.
For you, and potentially your fellow directors, using SIPPs for commercial property purchase can have several extremely compelling extra benefits, with access to capital being one of the most attractive.
Five years into a credit squeeze, small businesses are not exactly finding banks beating a path to their door to lend them money. For a small business that feels it is time to get the security and control of owning its own premises, doing so with borrowing sourced through the commercial entity itself may not be possible.
Through the SIPP there are two options – either as an outright cash purchase from the fund if there is enough capital, or by using the up to 50 per cent of fund value lending facility. Either way, access to capital without paying punitive interest rates is suddenly within the realms of possibility. Yes, the SIPP owns the property, not the commercial entity, but the business owner knows it does not have to deal with an unknown landlord.
You may also find other directors in the company want to get involved. Depending on the size of the property and the structure of the organisation, you may find a group SIPP or SSAS structure is suitable, with several directors all coming together to purchase the premises.
You will still need advice on the investment of the income from the tenant company, particularly once any borrowing has been paid off. Rental yields of anywhere between 5 and 8 per cent should see your pension pots given a boost, meaning you will have more assets to invest in the future.
Of course there are risks in putting too many eggs in one basket. However, small business owners are commercial people and normally have a pretty clear idea of whether their business is built on a solid foundation. And even if things do go wrong, their SIPP will still own the commercial premises.