Thinking about buying commercial property within a SIPP? Here are a few things to think about.
What is a SIPP?
A SIPP (self-investment personal pension) is a type of private pension that gives you a great deal of flexibility over your investment choices. The investments allowable within a SIPP include commercial property, land, shares, bonds, gilts, funds, private company shares and much more. Please, however, note that not all SIPPs are created equal, and some do restrict your investment choice. It is therefore of paramount importance that you set up the right type of SIPP for your circumstances.
Buying commercial property in a SIPP: lease back to yourself or someone else?
In a SIPP with full flexibility, you can use your fund to buy commercial property. You can choose whether to purchase property for your own business, or you can lease the property to a third-party. That’s your decision. Investing in a property for your own business can be very beneficial. Here are a few reasons why:
Relieves the financial burden on the business
Purchasing a property within your pension means that your business will not have to take on additional debt to fund the purchase if you don’t have the cash available. That can free up your cash-flow for working capital purposes. If you or your business already own the property, your pension scheme can also buy the property from you, releasing cash into your hands.
Just like when you lease property from a third-party landlord, the rent you pay reduces your taxable income as a business. The same applies when leasing a property from your SIPP. The payments are a business expense. You also have the added benefit that rent received by your SIPP isn’t taxable, as it is within the tax-advantaged environment of a pension. It can, therefore, be an excellent way to build your pension fund in a very tax efficient way.
…and good for business stability too
Your business benefits from having an in-house landlord, rather than a third-party that could sell at any moment and force your business to relocate when you reach a break point in the lease. Likewise, as the landlord of your own business’s property, you benefit from knowing the tenants. You have enhanced security that the rent will be paid (this must be at market value) and that the tenants will take appropriate care of your property. After all, it’s your business.
You’re protected against the unexpected
Nobody likes to think about the unimaginable. But it can be reassuring to know that with a SIPP your investment falls outside of your estate for inheritance tax purposes. The property is also unavailable to creditors in the event of bankruptcy. This can however be a double-edged sword, because you could have a situation whereby your business is struggling to pay the rent, and on default both your business and your pension suffers at the same time.
What if you are buying commercial property to lease to a third-party business?
It can still be a sound investment. But there’s slightly more risk involved. If your tenants decide to vacate the property, you may not be able to fill it with new tenants. It could leave you with annual SIPP charges that aren’t being covered by rental income. There’s also the cost of property upkeep and utility bills to consider – as well as regular property valuations that must be completed for the pension scheme administrators.
Buying a commercial property in a SIPP can be a good long-term investment. But it’s not without risks and it’s important to talk to an expert who can give you the knowledgeable and independent advice to allow you to make the right decision. Here at Prydis we have in-house business, legal and financial experts who can give you reliable advice that puts your best interests first – both for your business and the long-term future of your personal finances.
For expert advice, get in touch. We do not charge for an initial chat. Call our Exeter office on 01392 432431 or our London office on 0203 8239059.