How To Buy A Commercial Property In Your SIPP

Emilene LucasLegal Assessment Team Supervisor

Updated on 4th August 2024

Investing in property through a Self-Invested Personal Pension (SIPP) is an increasingly popular strategy for those looking to diversify their retirement savings.

Commercial properties, in. particular, are favoured because they can be included in a SIPP without the heavy tax penalties associated with residential properties. Investors are attracted to the ability to generate rental income tax-free and benefit from capital gains without paying capital gains tax when the property is sold.

This article will provide detailed insights on investing in property through a Self-Invested Personal Pension. We'll cover the advantages and potential downsides of incorporating property into your SIPP, how to select, purchase, and manage property within a SIPP, and explore the tax benefits and considerations of property investments within a SIPP.

What is a Self-Invested Personal Pension (SIPP)?

A Self-Invested Personal Pension is a special type of pension that gives you the freedom to decide where your money goes.

With a SIPP, you get to choose from a wide range of investments, such as stocks, bonds, funds, and even commercial property.

How does a SIPP work?

You put money into your SIPP, and then you decide where to invest it. You can manage these investments yourself, or hire a financial advisor to help you.

For every £80 you put in, the government adds £20 if you're a basic rate taxpayer. Higher-rate taxpayers can claim even more through their tax returns.

Any gains from your investments are sheltered from capital gains tax and income tax, meaning more of your money can grow over time.

You can start taking money out of your SIPP from age 55 (rising to 57 from 2028). You can take up to 25% of your savings tax-free, and the rest can be taken as income, which will be taxed like regular earnings.

What is a property SIPP?

With a property SIPP, you can invest in commercial properties, such as offices, warehouses, or shops.

You can even borrow money within your SIPP to help you buy the property. For example, if your SIPP has £100,000, you might be able to borrow an additional £50,000 to buy a property worth £150,000.

The rental income and any capital gains from the property grow tax-free within the SIPP. This means you don't pay income tax on the rent or capital gains tax when the property is sold.

What are the benefits of investing in property with a SIPP?

Tax relief on contributions

As we've mentioned, when you put money into your SIPP, you get tax relief. This means the government adds money to your contributions, boosting your pension pot.

Tax-free growth

Any rental income you earn from the property and any increase in the property's value are tax-free within the SIPP.

Diversification

Adding property to your SIPP allows you to diversify your investments. This means you're not just relying on stocks and bonds for your retirement savings.

Rental income

The property within your SIPP can generate rental income which goes back into your SIPP and can be reinvested.

Borrowing capacity

A SIPP can borrow up to 50% of its value to invest in property, giving you more purchasing power to invest in property.

Control and flexibility

With a SIPP, you can choose which properties to buy and manage them as you see fit.

Drawbacks and considerations

While investing in property through a SIPP offers some benefits, it also comes with several drawbacks and important considerations.

Restrictions on residential property investments

One major restriction is that SIPPs can't directly invest in residential property, including buy-to-let properties and holiday homes. This is to prevent personal use of the property, which would undermine the pension's tax advantages.

Instead, SIPPs are limited to commercial property investments.

Potential costs and fees

Investing in property through a SIPP can be costly. You might encounter:

• Legal fees associated with legal work required to purchase and manage the property;

• Surveyor fees;

• SIPP administration fees;

• Maintenance costs.

Property value fluctuations and liquidity

Investing in property is not without risks. For example, the value of the property can go up and down based on market conditions. So, if the property value decreases, it can negatively impact your pension's overall value.

Further, property is not as easily sold as other investments like stocks or bonds. This means if you need quick access to cash for retirement or expenses, it could be problematic.

What type of property investments are allowed in a SIPP?

A SIPP allows you to invest in various types of commercial properties including:

• Offices

• Warehouses

• Shops and retail units

• Industrial units

• Pubs and restaurants

• Hotels

• Land for commercial use.

Mixed-use properties, which combine residential and commercial spaces, can be included in a SIPP. However, the residential part must not be the primary focus and the property must primarily serve commercial purposes.

Direct investment in residential property is not allowed within a SIPP.

Investing in residential property within a SIPP can lead to:

• A potential tax charge of up to 70% of the property's value;

• An annual tax charge of 40% on the deemed income;

• Possible de-registration of the SIPP and clawback of any tax relief previously granted.

How to purchase a property through a SIPP

Selecting a SIPP provider

Look for providers that offer property investment options within their SIPP plans. Check their set-up fees, annual management fees, and transaction costs.

Funding the purchase

You can use the cash available in your SIPP to purchase the property outright or you can:

1. Borrow up to 50% of the SIPPs net value;

2. Pool your funds with other SIPP holders.

Purchasing the property

When you have identified a suitable commercial property that meets your investment criteria, work with a commercial property solicitor to handle the legal aspects of the transaction, including property checks and contracts.

You should also make sure your SIPP provider is involved throughout the process to approve the investment and handle the necessary paperwork.

Completion

When all checks are complete, and funding is secured, your solicitor will finalise the purchase.

The property is held within the SIPP, and rental income is paid directly into your SIPP.

HMRC rules on SIPPs and commercial property investments

Tax relief on contributions

Contributions you make to your SIPP are eligible for tax relief.

If you're a basic rate taxpayer, you get 20% tax relief. Higher rate taxpayers can claim even more.

Tax-free rental income

Any rental income earned from properties held within the SIPP is tax-free.

Capital gains tax exemption

When you sell a property held within your SIPP, any profit is exempt from capital gains tax.

Inheritance tax benefits

Property held within a SIPP is generally excluded from your estate for inheritance tax purposes.

VAT

If the commercial property you purchase is VAT-registered, you can reclaim the VAT through your SIPP.

This can significantly reduce the upfront cost of the property. For example, on a £500,000 property with VAT at 20%, you could reclaim £100,000.

You may need to elect to tax the property to reclaim VAT, which means charging VAT on the rent you receive.

While this adds an administrative step, it ensures you can recover VAT on expenses related to the property.

Impact of changes in pension regulations

Lifetime allowance abolition

The UK government announced the abolition of the lifetime allowance for pensions, which previously capped the amount you could accumulate in your pension without facing extra charges.

Now, you can grow your pension fund, including property investments, without worrying about breaching a lifetime limit and incurring additional taxes.

Increased annual allowance

The annual allowance for pension contributions has been increased from £40,000 to £60,000. This allows you to contribute more each year to your SIPP.

What happens to the property in my SIPP when I retire?

When you retire, you can:

Continue holding the property

You can keep the property in your SIPP and continue to receive tax-free rental income.

The property can also continue to appreciate, increasing the overall worth of your pension pot.

Drawdown

You can take a flexible income from. your SIPP while keeping the property as an investment. This allows you to withdraw money as needed, while the rest of your investments, including the property, can continue to grow.

You can take up to 25% of your SIPP value as a tax-free lump sum. The remaining amount can be used to provide a regular income, which will be taxed as a regular income.

Selling the property

You can sell the property and the proceeds from the sale will remain in the SIPP and can be used to provide a retirement income.

Who owns the property in a SIPP?

When you invest in property through as. SIPP, the property is owned by the SIPP, not by you.

This means the legal title of the property is held by the pension scheme trustees on behalf of your SIPP.

However, even though you don't own the property directly, you are the beneficiary of the SIPP, which means you benefit from any rental income and potential capital growth of the property within the SIPP.

What happens to the property in a SIPP when you die?

You can nominate anyone to inherit your SIPP by filling out an Expression of Wishes form, which guides the SIPP trustees on who should receive the benefits from your SIPP.

If you die before the age of 75, your beneficiaries can inherit the property within your SIPP tax-free.

If you die at age 75 or older, the benefits will be subject to income tax at the recipient's marginal rate. This means the money your beneficiaries withdraw from the SIPP will be added to their income and taxed accordingly.

In terms of property, beneficiaries can:

• Keep the property within the SIPP;

• Sell the property and withdraw the proceeds or reinvest them in the SIPP;

• Transfer the property to their pension scheme.

Does a SIPP pay Stamp Duty?

When your SIPP buys commercial property, it is liable for Stamp Duty Land Tax, just like any other property purchase. The amount depends on the purchase price of the property.

Your SIPP provider will handle the payment of Stamp Duty during the property purchase, and the funds must come from within the SPP.

Can two SIPPs buy a property?

Two SIPPs can jointly purchase a property by pooling their resources.

In these situations, the property is divided into shares based on the proportion of investment each SIPP makes.

Rental income from the property is split according to the ownership shares and paid into each SIPP. Similarly, any expenses related to the property are also divided proportionately.

Both SIPP providers must agree on the joint purchase and handle legalities.

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