What property can you hold in a SIPP? You might be surprised, says Caitlin Southall, senior marketing executive at Curtis Banks
You would be forgiven for assuming that you can only hold offices, industrial or retail property in a pension. After all, those tend to be the types of property one may associate with the term ‘commercial property’. But what about the weird and the wonderful property types, like a golf course, a yoga studio, theme parks or a zoo?
Before we delve into the property types in more detail, it is worth just reminding yourself about the tax advantages of holding a commercial property in a pension:
• No income tax payable on any rental income
• No capital gains tax payable on sale
• There may be a further advantage if the tenant is also the client’s business, in that the rent should be deductible from the trading profits of the business, thus saving corporation tax.
We have looked at the huge range of properties that can be held in a SIPP below, demonstrating the extent of the opportunities available to SIPP clients. It is worth bearing in mind that with any commercial property acquisition by a pension, due diligence will need to be undertaken to ensure that the property complies not only with HMRC regulations, but also the providers own risk appetite.
• Land – agricultural, equestrian, grazing: these are all types of land that you can hold in a SIPP. Client may wish to acquire land using their pension for a variety of reasons including development building a commercial property from the ground up, using their SIPP (which could possibly also pay for build costs). However, land can also include golf courses, or Christmas tree farms.
• Retail – this is a broad category and covers anything from corner shops to car showrooms. Retail remains a very popular SIPP investment despite recent, well-published challenges to the institution of the high street.
• Industrial – you can hold warehouses, workshops, breweries and distribution centres in a SIPP. It is worth noting that with some industrial properties and particularly in some geographical locations, industrial properties can sometimes have additional environmental considerations attached due to previous use. It is standard for providers to require an environmental report as part of their due diligence, which will check for any potential contamination.
• Offices – this type of commercial property is another popular choice for pension investors. Particularly popular with groups of clients investing via SIPPS (perhaps business partners), or clients who are selling their own business premises to a SIPP, maybe as part of their company cash flow planning. As a reminder, clients can sell a property to their own pensions. However, in order to comply with regulations, these transactions must take place at market value, as advised by a surveyor.
• Hospitality – investment in this type of property could range from hotels to bars, pubs or restaurants. As referenced above, properties such as hotels or bed and breakfasts can sometimes fall in a bit of a grey area from an HMRC taxable property perspective. Clients should be asking their providers at the outset what additional due diligence is required in order to get clarity and comfort that that would not be taking an interest in taxable property, and therefore exposing themselves to tax charges. Taxable property is defined as anything that is ‘suitable for use as a dwelling’ (i.e. a holiday let or aparthotel), and the acquisition of the same would impose onerous tax charges on the SIPP, and client personally.
• Leisure – this is perhaps the broadest category that we will look. Types of property in this category include recreational properties, like gyms or sports centres. However, it can also include properties such as airfields, zoos or cinemas, and even theme parks or go karting centres. These types of properties may not be the first thought when you think of ‘commercial property’ however they are possible to hold under pension regulations. With more unusual properties, there may be additional due diligence requirements or considerations, so early discussions with your provider would be beneficial to avoid confusion or frustration later on in the process.
• Non-residential institutions – properties under this category include dentist and doctors surgeries, day care crèches. These types of properties may appeal to clients who wish to sell their own property to a SIPP but continue to operate from the premises under a lease on completion.
However, the ability to convert the investment to an increase in fund value, and income into the SIPP is underpinned by two elements of due diligence that clients themselves need to undertake when finding a property that they wish to invest in:
1. The local markets: Clients should ensure that they have undertaken market research to underpin the value that they have agreed to pay for a property. They may speak with local estate agents or look on websites that track local transactions.
2. The covenant strength of any tenant: Due diligence on potential tenants should form a vital piece in terms of the suitability of a commercial property investment. Clients may be able to outsource this to an estate agent, to complete background or financial strength checks on potential tenants. Proceeding absent of these checks may mean that a lease is granted to a person or company that is financially unable to pay for the lease.
The term ‘commercial property’ is far more wide reaching than you may think. Clients considering using their pension to acquire a commercial property should consider the liquidity of the investment before proceeding. Property is an illiquid asset and some more unusual asset types can have a more limited market for resale. As such, clients should factor in any upcoming anticipation of taking income or drawdown if they are looking to invest in commercial property via their SIPP.
