Many investors will tell you that buying commercial property through a UK pension scheme is hugely beneficial, but many individuals, especially new entrees to the sector, are unable to determine which pension vehicle is the best for them.
So, what are the options?
There are two investment regulated pension schemes to choose from.
Self-invested personal pensions (SIPPs)
Self-invested personal pensions (SIPPs) are a type of government-approved personal pension, which allow individuals to make their own decisions about investments from a range approved by HMRC.
A SIPP is usually set up by an insurance company or specialist SIPP operator who has greater control over the investments made.
Anyone can take out a SIPP, provided they meet the eligibility requirements of the provider. SIPPs usually require a minimum fund size because the cost is higher than running a standard personal pension.
Small Self-Administered Schemes (SSAS)
Small Self-Administered Schemes (SSAS) are occupational pension schemes that can be set up by the directors of a company. This means that they can have more control over their investment decisions relating to their pensions, and can use their pension plans to invest in the business.
A SSAS can be used to purchase commercial property and both commercial and agricultural land. Once purchased, the land or property can be leased to a company or a third party. Land can also be developed into commercial property if you obtain planning permission.
What’s the difference?
Both of the above options are regulated and seen in the same way by HM Revenue and Customs (HMRC).
They are both investment regulated pension schemes, so the basic rules about lending, borrowing and investment are the same for both options.
Despite the underlying tax regulations being the same for both, the legislation and governance varies.
- Personal pension scheme
- Open to anyone
- Can’t lend to a company (this would be classed as an unauthorised payment)
- Higher running costs because it is a type of personal pension
- SIPP provider is the trustee
- Doesn’t have a sponsoring employer (although any employer can contribute to it)
- Members employers can contribute to the pension plan and operate a deduction to pay on behalf of the member
- Can invest up to 100% of the fund in the shares of a company (including one run by the member)
- If the company is controlled by the SIPP member or someone associated with them, the company would be seen as investing in taxable property
- There is the possibility to own 100% of a company’s shares if the company is not controlled by the member and it meets the requirements of the SIPP provider
- Occupational pension scheme
- Greater flexibility with investment and control
- Can lend to a company (sponsoring employers)
- Usually only available to directors of companies
- Members (such as employees or directors) are usually the trustees
- There is no limit on the number of members
- Each member has a notional share of the SSAS funds, including assets that are not insured such as property
- Can invest up to 5% of the fund value in the shares of the sponsoring company
- Can buy shares in more than one sponsoring company if the total market value at the time the shares are bought is less than 20% of the total value of the SSAS
- There is the possibility to own 100% of a company’s shares – but only if the value of the shares doesn’t exceed 5% of the value of the SSAS.
Which is best for buying commercial property?
The use of SIPPs is widely reported in the press, but you should also consider a SSAS.
This is a stand-alone trust, rather than multiple members of a SIPP which join a large group scheme and an operator will have the final say on how the investment is run. What is important here is that every SSAS member is an equal trustee who has an equal say on the decisions.
A SSAS can also help buyers to pool their funds together to bring costs down. With a SSAS being able to hold multiple members, this means that the one transaction fee can be split across many.
This is in contrast to SIPPs, where all the mini transactions will be individually priced, meaning double pension provider and solicitor fees.
There is also pooling for perfect exit strategies, as if one member wants to leave a SIPP or dies, there could be various complications as the remaining members will need to collect funds from their own SIPPs to buy the member's share of the property.
As the site will be owned by one single scheme in a SSAS, the share is reached back to the SSAS manager and it can be funded by cash from the SSAS bank account.
The most important aspect of a SSAS is the self-management side. A SIPP trustee firm tends to decide how a property is managed, but with the joint ownership of a SSAS, members are able to self-manage the site. This is anything from collecting the rent, insuring the property, carrying out rent reviews and managing VAT returns.
A SSAS guarantees flexibility and control over your assets, so consider this option when entering the sector or expanding your portfolio.