Exam refresher: Using a SIPP to Buy Property
25 June 2020
Small business owners with pension plans may be attracted to the idea of using their fund to buy a property to run their business from. This is also a popular topic tested in the CII AF2 business financial planning exam.
This post was originally published on the Brand Financial Training Blog at https://brandft.co.uk/using-a-sipp-to-buy-property/ and has been reproduced here with their permission. All content © Brand Financial Training.
Firstly, the pension wrapper must offer self-investment; so it must be either a self-invested personal pension (SIPP) or a small self-administered scheme (SSAS).
Here, we are focusing on SIPPs only.
Once a property has been found, a valuation will be needed, and with a ‘connected property’, there should be confirmation that a fair market value is being paid. Where a SIPP is buying property from a connected party or renting it to a connected party, i.e. the SIPP member’s business, the transaction must be carried out on a commercial basis.
A valuer will be necessary to value the property, and a solicitor will be needed to carry out the legalities of the property purchase.
If the pension fund value is not sufficient to meet the full cost of the property, the SIPP is able to borrow funds from a bank or a building society of up to 50% of assets (less any existing borrowings).
If the purchase price of the property is £600,000 including costs, then the SIPP must have a fund of £400,000, as it can borrow 50% of this to make up the £600,000 needed.
As an alternative, the fund can be boosted by making further pension contributions (subject to the usual rules regarding annual allowance and carry forward availability), or the property purchase could be made jointly by the pension and either the business or the business owner.
There are quite a few costs involved, and the SIPP will need to have some liquidity to cover these including:
There are various advantages for a SIPP owning existing business premises:
However, there are other considerations:
Common questions in the AF2 paper include: how much extra pension contribution is needed to fund a purchase, the rules around borrowing, and the benefits of buying through a pension fund rather than directly.
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