Maximising Retirement Investments: Purchasing Commercial Property through a SIPP

Purchasing commercial property through a Self-Invested Personal Pension (SIPP) or a Small Self-Administered Scheme (SSAS) can be an advantageous way to invest for retirement and can be a great tool for a family business. The focus of this article is the purchase of commercial property through a SIPP.

What is a SIPP?

A Self-Invested Personal Pension (SIPP) is a type of pension plan that allows individuals to have greater control over their retirement investments. SIPPs can invest in a wide range of assets, including commercial property. This investment can be used to purchase the business premises, or this vehicle can be used to purchase an unrelated commercial property with a view to leasing this out to an unconnected party to generate an income to benefit the income stream of the family business. It should be noted that any lease (whether to a connected or unconnected party) must be for the market rent and the terms of any lease must be approved by your SIPP provider

Benefits of Purchasing Commercial Property through a SIPP

There are many benefits of using this vehicle to purchase your family business and a number of these have been highlighted below:

• Tax Efficiency: Contributions to SIPPs receive tax relief, meaning the investment grows tax-free.
• Rental Income: Rent received from commercial property is paid into the SIPP and is free from income tax.
• Capital Growth: Any capital gains on the property within the SIPP are free from capital gains tax.
• Control: Investors have control over property choice, management, and leasing terms.

It is also possible for several people, e.g. family members, to pool their pension funds together to purchase property. This means that everyone’s pension fund owns a percentage of the property and a pro-rata amount of rental income

The Risks

As with every investment, the market and the value of commercial property can go up as well as down and are influenced by many factors, in particular, the supply and demand of property and the current economy, and this could affect the value of your pension pot and your ability to find a good tenant for the Premises.

Rental values can fluctuate so you could find yourself with less of a rental income than projected. Tenants can also go out of business during the term of a lease and you could end up with no tenant and no income and the costs of securing a new tenant.

If you decide to sell the property and the market is not particularly buoyant then you may achieve a lower price for the Property that you paid resulting in a loss. Although, it should be noted that you will have received a rental income during the term of any lease that will have boosted the pension pot. In addition, a sale may not happen quickly and so converting the property into cash can take time and is entirely dependent upon finding a buyer.

It should also be taken into consideration that there are ongoing costs with this vehicle including property management, maintenance, and all SIPP or SSAS provide fees including pension trustee administration costs, which vary but can be costly. In addition, if the family business is leasing the property then this is at market rent and so is an additional annual cist that the family business must bear (albeit this goes back into the pension pot)

How to Purchase Commercial Property through a SIPP in Scotland

There are numerous providers who you can speak to in relation to purchasing your commercial property through a SIPP and it is important to get the right provider to suit your family business needs with particular attention being paid to the SIPP Rules. It is important that your chosen SIPP provider allows investment in commercial property and you must fully understand any specific rules or limitations that your chosen provider may have.

Fund the SIPP:

Your SIPP must always have funds to purchase the property. Borrowing from a high street lender to be secured over the property is permitted in certain cases, however, if you do require to borrow funds then it should be noted that there are only certain lenders who will allow security over a property purchased through a SIPP and so research will be required if you are to go down that route. The lenders also tend to have a maximum percentage of the loan to value that they will allow you to borrow and so it is likely that a large chuck of the purchase price will require to be self-funded.

Once you have chosen your SIPP provider and funds are in place the next step is to find a property. It is fairly common for the SIPP to purchase the existing family business premises (whether it is already owned by a family member or a third party or maybe the premises that you currently lease). You will require to obtain SIPP Provider Approval of the chosen commercial property and this generally involves them being provided with a full suite of due diligence documentation, including the property valuation, surveys, and sight of the missives (legal contract for the purchase of the property).  Approval from the SIPP provider will be required before any legally binding contract to purchase the property is entered into and the SIPP will typically have certain clauses that must be included in the missives and certain points where there will be no room for negotiation.

Assuming you have identified your property, the SIPP has approved this and the purchase takes place there are ongoing administrative, maintenance, legal, and tax-related obligations that you must comply with.

The property must be managed in accordance with HMRC rules for SIPPs as non –compliance can result in penalties. This includes ensuring that any rental income is paid directly into the SIPP and that the property is maintained properly.

It should also be noted that there will be ongoing costs of property management, maintenance, and any SIPP provider fees and these could be costly.

Summary

Purchasing commercial property through a SIPP in Scotland can be a beneficial way to invest for retirement and to protect your family business with there being tax benefits and potential income and capital growth. When considering whether or not this vehicle is appropriate for your family business it is important that you take advice for the relevant legal and financial advisors to ensure this is the best option for you and your family business.

To discuss your family business real estate, please contact Jennifer Davidson, by email jdavidson@gilsongray.co.uk or visit our service page.