18/12/19SIPPs: What you need to know about holding business premises

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.

There are essentially two ways business premises can be held in a SIPP.

  • The funded purchase model allows a pension to purchase property using the pension funds, with the property then being placed directly in the 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. However, selling other appropriate assets to use this option is considered extremely high risk and should only be considered in rare circumstances.

First, 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. This should include looking at your long terms plans and an exit strategy it could be a difficult to sell the asset.

You’ll also need to consider the other types of assets a SIPP would hold. Having a pension with a single asset or asset type is high risk. Your investments should reflect your risk profile.

So, why is it an option that may want 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. However, it’s important to note that rents must be in line with commercial rates. You can’t give pay rent at a discounted price.

It’s also important to note that tax owed will be dependent on a variety of factors, including the makeup of the company. You should check how this, as well as other factors such as property ownership, will affect your decision and the outcomes. Please contact us to discuss your personal circumstances and whether this is an option that could work for you

2. No Capital Gains Tax will be due on the sale of the property

This shouldn’t be the sole reason for transferring into a SIPP. However, if a SIPP is appropriate and is right for you and can be a benefit. 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. Yet, 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.

As with above, tax positions are dependant on a range of factors and it’s crucial that you consider your personal situation before making any decisions.

3. 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 net 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. You should be aware that borrowing to invest can be a risky strategy as there is a chance that the investment growth rate will not outweigh the interest rate on the money borrowed.

4. 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.

Under HM Revenue and Customs rules, any death benefit lump sum which has not been paid within 2 years of the date we are notified of death, will be subject to tax. This applies to both uncrystallised and crystallised (e.g. Income Drawdown) funds. Any lump sum and any income/annuity payments will also be subject to tax if the customer died on or after the age of 75.

5. 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.

If you want to explore how a SIPP could align with your aspirations, please get in touch.

Please note: A pension is a long-term investment not normally accessible until 55. Self-Invested Personal Pensions aren’t suitable for everyone. In common with other investments that can be held in a pension, property can fall in value as well as rise. You could get back less than invested. Please remember that selling property may take a long time and can be difficult to sell. You may not be able to sell/cash in this investment when you want to. You should be aware that borrowing to invest can be a risky strategy as there is a chance that the investment growth rate will not outweigh the interest rate on the money borrowed.

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