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Sipp property purchase case study

SIPP property purchase case study

The below guide offers an example and some guidance as to the benefits of purchasing a commercial property via a pension scheme, and further property literature can be found on our website:

Funding the purchase

  • Contributions (personal/employer and can utilise carry forward if available)
  • Transfers from other registered pension schemes
  • Borrowing – up to 50% of net value of the SIPP/SSAS
  • SIPP/SSAS is able to borrow funds from member or connected party
  • Part purchases are permitted if the scheme is unable to purchase the whole property

Advantages of SIPP/SSAS property investment

  • Tax relief on contributions
  • No tax on rental income
  • No capital gains liability on asset sold within scheme
  • If the client is also a tenant, rent paid to the SIPP tax deductible from trading profits
  • Generally, SIPP/SSAS assets are outside of the reach of creditors
  • In most circumstances assets held in SIPP/SSAS fall outside of estate for IHT purposes and can be passed down through the generations

What type of property can you purchase with a SIPP or SSAS?

  • Commercial property including offices, retail units, industrial units
  • Freehold and long leasehold premises
  • Land purchases (commercial, agricultural and development)
  • Residential property is not permitted or anything suitable for use as a dwelling

Key considerations

Connected transactions such as sale and leaseback deals must be supported by independent valuations by a suitably qualified surveyor.

VAT – SIPP and SSAS may be registered for VAT in order to recover tax on the purchase and/or any property development. Once a property is elected, VAT must be charged on ongoing rent. It is important that VAT advice is provided by a qualified individual.

Example – client purchasing their business property

David recently received his annual statement from his pension provider, and presented this to his financial adviser at their annual review meeting. It was noted that his fund had increased to £250,000.

David mentioned that he would like to explore the possibility of purchasing the company’s commercial premises via a pension fund, in order to boost the return on his pension assets and also to provide a cash injection to the business and help with its development. His adviser mentioned that David should consider transferring to a SIPP, which would give him the flexibility to purchase the property with his pension funds.

The property had been elected for VAT following development works undertaken several years ago. David consulted with a VAT expert, who confirmed he would be able to register the SIPP for VAT in order for the SIPP to reclaim the tax payable on the purchase price.

As HMRC would deem this to be a connected transaction, David instructed a RICS qualified surveyor to value the property. The property was subsequently valued at £200,000 and the solicitor provided the following completion statement once searches had been completed and a completion date had been agreed:

  • Property purchase price: £200,000
  • Stamp duty: £1,800
  • VAT @ 20%: £40,000
  • Legal costs (incl. VAT): £2,400
  • Disbursements: £200
  • Annual SIPP fee (incl. VAT): £984
  • SIPP property purchase fee (incl. VAT): £960
  • Total: £246,344

The property was insured by the trustees via a specialist block insurance scheme designed specifically to cover trustee owner’s risks.

An arm’s length lease was also put in place between the SIPP and David’s business, the rental value being confirmed within the independent valuation.

Outcome: The SIPP receives (tax free) future rental income from David’s business as the tenant as per the terms of the commercial lease. The residual funds can then be invested into another investment product within the SIPP wrapper (e.g. a DFM) via a standing order set up to transfer rental payments at quarterly intervals.

Example case study: Joint property purchase

Charlie Dickens has his own Accountancy practice which he runs as an LLP from rented offices. The landlord has told Charlie that he wants to sell the building and asks whether he would be interested in buying it.

The offices are on the high street and as Charlie has been there for some years he is well known in the area and wouldn’t like to move. He also likes the idea of owning a property which he has some control over.

Charlie speaks to his Financial Planner about how best to fund the purchase. The key facts are:

  • The asking price for the offices were £300,000 but Charlie has negotiated a discount to £295,000
  • Charlie has £100,000 in various pensions, he also has £40,000 in spare savings which he could use to help purchase the property
  • The Accountancy practice is very successful and Charlie enjoys a salary is £100,000 a year
  • The Accountancy practice has £25,000 spare capital available which could be used to help purchase the property
Possible solution

It is clear to Charlie’s adviser that the most appropriate way forward is for the property to be bought jointly by a SIPP and the business.

Charlie’s adviser explains to him that the property cannot be bought in a Personal Pension and that a SIPP would need to be used, with a market rent being paid to the SIPP each month. Charlie is happy to do this, he would prefer to pay rent into his own pension rather than the existing landlord.

Charlie’s adviser also explains the main advantages and disadvantages of using a SIPP to buy a property. Charlie listens and decides at the end of the conversation he still wishes to proceed.

His adviser then conducts research into Charlie’s existing pensions to confirm that if they are transferred to a SIPP no important guarantees would be lost and that no penalties would be charged, this is not the case and once a suitable SIPP is identified the transfers takes place, but not before his adviser explains the charges associated with a SIPP property purchase and compares these to the existing pensions.

Once the £100,000 transfer proceeds have been received they are held in the SIPP bank account awaiting the completion of the purchase.

The adviser also recommends the following:

  • Charlie makes a personal contribution of £40,000 and HMRC pay £10,000 basic rate relief to the SIPP. Charlie will also qualify for additional tax relief which he will claim through his tax return
  • The SIPP borrows £75,000 from Charlie’s existing bank, who know him well and are supportive of his business. This means £225,000 is available
  • The partnership borrows £50,000 which means a total of £75,000 is available
  • The SIPP purchases 75% of the property, with the partnership purchasing 25 on a tenants in common basis
  • The £5,000 balance is used to meet legal costs, SIPP set up fees and pay for the advice given by Charlie’s Financial Planner

By utilising his SIPP along with money in the business Charlie has been able to buy premises for his business.

The purchase would not have been possible without the use of a SIPP as the capital available outside of the SIPP would have not provided a sufficiently large deposit to secure bank financing.

Furthermore Charlie likes the tax efficiency of owning a proportion of the property in his SIPP, he believes that he is buying when property prices are low and anticipates capital growth over years to come. Although he is smart enough to realise that this is far from guaranteed.

Finally he likes paying rent to his own pension rather than a landlord, whilst a proportion of the rent will be used to repay the bank loan; once this has ended it will start to build his pension fund to help finance his retirement.

Next steps

If you would like to learn more about buying your business premises in a SIPP then speak to our team of highly qualified and experienced Independent Financial Advisers on 0115 933 8433 or email [email protected]

Ask a financial planner

Whatever your question, our team of financial planners are here to help. Alternatively, if you’d like to book a no-obligation meeting or call, we’d be happy to arrange a suitable time.