SIPP – an acronym for Self Invested Personal Pension – is a do-it-yourself pension
scheme that permits an investor to have full control over the way in which his or her retirement savings are invested.
In an ordinary pension scheme, the choice is limited to a finite number of specific investment opportunities, whereas within a SIPP, anything goes, subject only to the agreement of the SIPP provider.
However, while all assets are permitted by Her Majesty’s Revenue and Customs (HMRC), bear in mind that some assets are subject to tax charges, while others are not.
The idea behind SIPPS is that instead of an investor becoming frustrated watching underperforming funds damage his or her future wealth, he or she can take charge to ensure that the pension scheme performs to the best of its ability through the judicious buying, selling and leasing of assets.
Buying a commercial property in a SIPP
A SIPP allows an investor to invest not just in the traditional vehicles such as unit trusts, but also in such assets as commercial property. This type of investment is favoured by business owners who are fed up with being tenants and those who wish to rent the property to a third party.
A commercial property can be bought outright using all or part of the money in a SIPP. If the funds are insufficient, they can be topped up by a bank loan. A SIPP is permitted borrow up to 50% of its value, and most banks are willing to oblige.
If a property is being bought so that an investor can become his or her own tenant, a bank will want to satisfy itself that the business has a sound trading history and can meet the periodic rental payments.
On the other hand, if a property is being bought to rent to a third party, banks may not be so keen to lend unless the property is very ‘letable’ or has a sitting tenant.
The secret to a successful purchase lies in the preparation and groundwork. An investor needs to ensure that his or her pension funds are with their chosen SIPP provider, making a transfer if necessary, and if that step is required, advice needs to be taken, as it is not a straightforward matter.
Also, investors should steer clear of risky investments in the run up to a property purchase, as they may fall in value and diminish the amount of money in the SIPP pot.
Before making a purchase, it is imperative to check whether VAT is involved, as it will increase the initial sum of money that has to be paid out.
Of course, that can be reclaimed later, but only if the investor is registered and conforms to any laws that may be in force at the time.
Why buying commercial property in a SIPP is a good idea
Although purchasing a commercial property in a SIPP is not a cheap way of finding business premises, as a market rent will have to be paid and a proper lease signed, it does bring several benefits:
- An investor’s SIPP does not pay tax on rental payments or on any profit that is made when the property is sold.
- The capital held in a SIPP allows the owner extra reserves to make a commercial property purchase, which is especially useful when times are tough.
- Borrowing money through, or using money of, a SIPP to purchase a property can make the difference between such a transaction taking place or not.
- Contributions to a SIPP gain tax relief, which effectively helps to finance any property purchase.
- A SIPP meets all legal costs and disbursements.
- It is possible to get together with business partners and combine everyone’s SIPPs to buy a property.