Putting commercial property into a SIPP or SSAS can have significant advantages but with recent changes to the tax landscape has become more complex. Stephen McPhillips, Technical Sales Director, Dentons Pension Management Limited, strips the process back to basics in language a client can understand.
Investing in commercial property through a self invested pension scheme can be a powerful way for clients to build long-term wealth. In this article, we have outlined some common questions from self invested personal pension (SIPP) and small self administered scheme (SSAS) clients who are considering buying or currently hold commercial property within their scheme.
Can my SIPP or SSAS own commercial property?
Yes. Depending on the pension provider, both SIPPs and SSASs can invest in UK commercial property including offices, warehouses, shops, and public houses. Commercial property with a residential element can only be accepted on very restricted terms, but residential property on its own is not allowed, as it would give rise to tax charges. The rules around property ownership are identical across SIPP and SSAS.
Who owns the property?
There is a misconception amongst some clients that they, as individuals, own the property, but this is not the case – the pension scheme owns the property. In the case of a SSAS, usually this means the trustees of the SSAS. In the case of SIPPs, the legal owner of the property might include the member, as a trustee of the SIPP, or it might be the SIPP provider in some form.
Can my client’s business occupy the property?
Yes. A client’s business can lease the property from a SIPP or SSAS. This is known as a ‘connected party transaction’. A formal, commercial lease agreement must be in place and the rent set at a market value – as determined by an RICS Registered Valuer.
Does my client need a lease if their own company is using the property?
Yes. Even if your client’s pension scheme is the landlord and their business is the tenant, a lease is essential. This protects the SIPP or SSAS, satisfies HM Revenue & Customs (HMRC) rules, ensures clarity around rent, and sets responsibilities for maintaining and insuring the property.
How is rent decided?
Where the property is leased to an unconnected third party, the rent may be set at the discretion of the property owner and agreed through negotiation between the owner and the prospective tenant. While a formal valuation is not a legislative requirement in these circumstances, it is strongly recommended that the rent reflects the current open market value and is supported by appropriate evidence (e.g. comparable transactions or independent advice). This helps demonstrate that the arrangement is on commercial, arm’s length terms, which is a key requirement for pension scheme compliance.
Where the property is leased to a connected party, the pension scheme trustees/provider will commission an independent professional surveyor who is MRICS or FRICS qualified and is a Registered Valuer, to determine the open market rent payable based on the proposed lease terms.
Any subsequent rent reviews should also be conducted on commercial terms in line with the lease provisions. If material improvements are made to the property, or lease terms are altered, a reassessment of the rent may be appropriate.
What happens to the rental income?
All rental income from tenants is received gross and is free from income tax. Rental income payable by the tenants can be treated by them as a business expense for tax purposes and can reduce the income and corporation tax liability of the tenant.
The rental income is paid directly into the SIPP or SSAS bank account where it can be held as cash or reinvested.
How often does the property need to be revalued?
There is no requirement for a SIPP or SSAS to conduct periodic valuations of its commercial properties. However, a valuation will typically be required for the following events:
- Purchase from, or sale to a connected party
- Lease rent review/renewal
- Retirement or death
Can my client buy a property jointly with their company or another person?
Yes. Depending on the provider, it can be possible to jointly own property with:
- Other pension schemes of that provider
- Pension schemes from other provider(s)
- A business and/or individual – including the client.
Ownership should be recorded in percentage terms and each party should receive rental income in the appropriate percentage proportion.
Can the scheme borrow to help fund a property purchase?
Yes, depending on the provider. Maximum borrowing is 50% of the net asset value of the pension scheme at the time of borrowing, minus any outstanding scheme borrowing. Hence, the value of the property being bought is irrelevant in the calculation.
Can the scheme fund property improvements?
Yes, depending on the provider. The SIPP or SSAS can pay for property enhancements or development work provided the improvements are commercially sensible, are paid for from the pension fund and the work is properly documented. The pension scheme should not, however, be funding items which can be touched and moved such as desks, chairs, partitions, computer equipment and so on, as these would be treated as “tangible moveable” and hence “taxable” property by HMRC.
Who pays for repairs and running costs?
Tenants will normally be subject to a full “repairing and insuring lease” and hence they are responsible for covering these costs.
What happens to the property when my client begins to take retirement benefits?
When clients start to take benefits, they can:
- Keep the commercial property within the SIPP or SSAS or;
- Sell the property to release capital or;
- Use the rental income as pension income if desired.
The commercial property can remain within the pension wrapper and continue to grow tax-free.
What happens to the property when my client dies?
The commercial property can be:
- Sold, and the proceeds paid into the beneficiaries’ drawdown fund
- Retained in a pension scheme, continuing to generate income for the benefit of the SIPP beneficiaries.
This usually happens free of Inheritance Tax (IHT). However, new IHT rules are due to come into effect from April 2027 under current Government proposals.
How will the new IHT rules on pensions affect my holding of commercial property within my SIPP/SSAS?
From 6 April 2027, all unused pension funds, including commercial property owned by SIPP or SSAS, will be brought into the client’s estate for IHT purposes. Payments of death benefits to a spouse or civil partner will remain exempt from IHT under the current proposals.
Will this mean that commercial property ownership in a pension scheme is no longer a viable option?
Commercial property investment remains an attractive pension scheme investment, especially given that rent is received tax-free into the scheme bank account and the fact that there is no Capital Gains Tax (CGT) on eventual disposal of the property by the pension scheme.
Because of the complex nature of estate planning, which will become slightly more complicated in the lead up to April 2027 and beyond, clients will benefit from sound, professional retirement and estate planning advice more than ever before.
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