Growing wealth through Self-Invested Personal Pensions (SIPPs) and Commercial Property
Categories: NewsExpert Sian Wolstenholme looks at how Self-Invested Personal Pensions (SIPPs) can be used to purchase commercial property.
Buying commercial property using a Self-Invested Personal Pension (SIPP) can be a long-term, tax efficient way to diversify your portfolio and save for the future – but it can be a complex strategy.
Money contributed to a SIPP can be used for a wide range of investments, but commercial property is a particularly attractive option due to the strong returns and tax advantages. Properties could include land, shops, offices, warehouses, industrial units and factories.
There are a few different ways to invest in commercial property through a SIPP. The most straight-forward option is to buy a property directly through the SIPP, but you can also transfer the title of a property already owned into your SIPP, or even pool money with other investors.
Tax advantages of buying commercial property through a SIPP
- If you use the funds from your SIPP to buy a commercial property to be used as your own business premises, you will still have to pay rent at commercial rates to the SIPP. However, as rent is an allowable business expense, it will reduce the tax you pay on any business profits. This will see your SIPP grow through regular income – and you can also offer your business favourable lease terms.
- If you purchase a commercial property from your SIPP and let it out to another party, the income received into the SIPP is exempt from income tax.
- What’s more, if a gain occurs when you sell the property, the capital growth will belong to the SIPP and will, therefore, not be subject to capital gains tax.
- If you die, the property owned by the SIPP does not form part of your estate for inheritance tax purposes, allowing you to leave money to your family via a pension and in a tax-efficient manner.
Other benefits
- Holding commercial property in a SIPP provides diversification away from more traditional investments like stocks and bonds. This is attractive for investors as it helps spread risk across the pension portfolio.
- Investing through a SIPP offers a level of control over your pension portfolio that stocks and bonds do not.
Things just got better
In 2023 the Chancellor announced that the lifetime allowance – the maximum amount of pension benefits that can be held in a pension scheme over a person’s life – was to be abolished.
No tax is charged on any pension benefits. Further still, the amount that people can pay into their pension each year was hiked from £40,000 to £60,000.
Ultimately, the amount investors can save into their pension pots is now unlimited.
Warnings and considerations
Commercial properties do, however, come with ongoing management and maintenance. There is also the potential for periods of vacancy or bad tenants, during which income could dry up and the value of the SIPP could decrease.
Market fluctuations should also be considered, bearing in mind that there is no guarantee that property prices will rise indefinitely. Such acquisitions should therefore be long term investments.
It is not always easy to sell commercial property. It is not uncommon for it to take many months, or even years, to find a buyer, depending on location and building type.
SIPP providers normally also have strict due diligence and may not always support the acquisition if they feel it is a risk to the pension scheme.
It is important that careful consideration is taken before buying commercial property through a SIPP to ensure the investment falls within your strategy and risk tolerance.
ORJ’s team of experienced commercial conveyancers can help advise and guide you on the next steps. Get in touch today by emailing team@orj.co.uk or calling 01785 223440.