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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).

Example

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:

• SIPP set-up fees, property purchase fees, and annual fees
• Advice fees, if appropriate
• Property management fees
• Solicitor/valuation fees
• VAT (if applicable)
• Stamp duty land tax

There are various advantages for a SIPP owning existing business premises:

• A significant amount of cash becomes available to the business for other investment
• The potential for capital growth with no CGT
• If the property is rented, a commercial rent must be paid to the SIPP
• Rent should qualify as an allowable business expense to reduce tax on business profits
• Rent paid to the SIPP grows income tax free (and can cover any loan repayments)
• The purchase cost is effectively reduced by tax relief on pension contributions
• Rent has no impact on the annual allowance
• If VAT applies, the SIPP can register to reclaim this
• Property held in a SIPP is protected from creditors
• Property can be handed down the generations tax-free if death occurs before 75

However, there are other considerations:

• High costs: of buying the property, as well as its being held in the SIPP
• If the property is rented to the business of the SIPP owner, rent must be on commercial terms, and a lease must be drawn up by a solicitor set at market rent
• The value of the property could fall
• Selling commercial property can be a difficult and long process
• It might not be possible to sell when the owner wants to
• If the only asset in the fund is property, how will future pension income be provided?
• No diversification if exposed to just one asset class

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.