If you’re a business owner, it’s likely that you own or rent commercial property from which you run your business – perhaps an office block, factory or shop. Whether that property is owned by your business or rented, it can be more tax efficient for ownership of the property to sit within a personal pension or more specifically within a SIPP.
SIPPs are pension wrappers that can hold a variety of investments, including commercial property. At this point I should highlight that only commercial property can be held within a SIPP – it cannot be a private residence, buy to let or holiday property.
The SIPP investment can be a property unconnected to the business but for simplicity, this blog covers commercial property used by the business owner.
Holding commercial property within a SIPP has several benefits for a business owner. It can be a complex area so a few scenarios where this might make financial sense are illustrated below.
A business owns a property worth £300k with no mortgage. The business owner has a variety of pensions worth £600k, which have been accumulated over the years.
The business owner could use the various pension funds proactively to help the business by consolidating them into a SIPP.
The SIPP can then buy the property so consequently the SIPP holds funds worth £300k plus a £300k property.
The business will have an influx of cash (£300k payment for the property) and will pay rent to the SIPP at the going rate. These rental payments are topping up the pension pot.
If needed the SIPP can also borrow up to 50% of its value to help purchase the property.
A business owner has £600k in a SIPP and rents a commercial property worth £300k from a third party at a rate of £1,500 per month. The property could be bought by the SIPP, leaving funds of £300k plus the property within the SIPP. The business owner continues to pay rent at £1,500 but the rental payments go into the SIPP, topping up the pension fund.
Business owner has several pensions which are consolidated into the SIPP. The business has surplus cash so can make a large pension contribution to the business owner’s SIPP. This may potentially bring tax efficiencies to the business although it will depend on the type of business. The SIPP then purchases a property for use by the business. The SIPP can potentially take out a mortgage for any additional funds needed to a maximum of 50% of the SIPP assets.
The business now rents the property and the rental payments top up the SIPP, also potentially covering mortgage payments.
As with all financial planning, each case is different. Your individual circumstances and business structure will influence what is suitable for your situation.
A summary of the main benefits and drawbacks of holding commercial property within a SIPP are outlined below:
• When the property is ultimately sold by the pension fund to provide you with retirement benefits there is no Capital Gains Tax (CGT) liability.
• Following the SIPP’s purchase, any capital growth in the property is exempt from CGT.
• Assets in the SIPP - including the property - should fall outside of your estate for IHT purposes, other than if benefits are ultimately provided by an alternatively secured pension.
• The rental income received by the SIPP is tax free.
• As an asset of the SIPP, the property would not generally be accessible to creditors in the event of an individual or company going bankrupt.
• It is simple for the SIPP investors to sell part or all of the property to another SIPP investor or to and ‘outside’ SIPP purchaser.
• The property could be paid to a beneficiary as an in-specie death benefit to avoid the need for sale of property on death, provided enough cash is available for any tax charges.
• The property is legally owned by the SIPP which could be seen as a lack of control.
• The property will need to be valued when benefits are drawn or loans are considered. On these occasions the SIPP will incur the cost.
• The sale of a property could be at an inopportune time if a sale is required to pay benefits; both in terms of being able to sell the property and also in terms of obtaining the optimum price on sale.
• If the SIPP provider has borrowed to purchase the property, they may be faced with high capital repayments to keep the term of the loan to a minimum. Interest payable on the loan by the SIPP will not qualify for tax relief as the scheme does not pay tax.
• Loan repayments and other expenses such as business rates and service charge will still need to be maintained even if the property is empty, this may result in other assets or the property having to be sold.
• If the property represents the main asset of the SIPP it would leave its investment holdings poorly diversified.
• The scheme will have to register for VAT if the property is not VAT exempt.
I’ve helped clients with scenarios similar to the three above but every situation is different and your personal and commercial position should be considered holistically. With complex financial planning situations such as this, always seek expert advice.