They say everything has a silver lining – even Covid.
Self-Invested Personal Pensions weren’t spawned by the pandemic – the astute were already on board – but it stimulated interest.
With the cost of borrowing and renting going up along with a change to Capital Gains Tax allowances, it might be a good time for business owners to look at the option of purchasing a commercial property within an individual’s pension fund.
Your independent financial adviser can set up a SIPP or alternatively a Small Self-Administered Scheme (SSAS). Any investments in an already operational pension fund can be transferred. It is also possible to sell your or your company’s existing commercial property to your SIPP or SSAS to raise capital and to benefit from the tax advantages that come with it.
Sara Garnett, partner in law firm Tilly Bailey & Irvine, said: “Owning a property in a SIPP or a SSAS has many advantages, whether used for your business or rented to a third party.
“The rental income is received tax-free by the SIPP or SSAS and, on disposal, there is no capital gains tax payable on any increase in the property’s value. The rent paid by your business will reduce operating profit and therefore the amount of tax payable and the rent received can be used by the SIPP or SSAS to repay any borrowing or to increase the amount of cash held within or invested by the fund.”
The manoeuvre essentially involves clients with their own business – typically those who own a small and medium enterprise – placing their company premises inside a SIPP.
FTAdviser notes: “There are two broad approaches.
“One is the equity release model, where a business can place premises they already own into a SIPP, effectively exchanging the pension fund already accumulated for the property itself. The other is the funded purchase model, where the property is purchased using the pension fund and placed directly into the SIPP.”
Once transacted, ownership effectively passes to the pension and the premises are leased back to the business, meaning that any rent paid would then go into the pension rather than to a third-party landlord.
“Purchasing business premises to hold in a SIPP will be common sense for many, but it will not always be an appropriate option.
“Those it can be suitable for typically do not plan to sell their business in the near future, are financially stable and therefore unlikely to need access to the capital tied up in the property, have no problems meeting the rent if they occupy the premises, and/or meeting any ongoing property maintenance costs.”
Nevertheless, beware downsides and potential complexities.
FTAdviser cautions: “There can be challenges around tax implications too, including Inheritance Tax (IHT), Value Added Tax (VAT) and lifetime pension allowances.
“Alternatively, commercial property may not fit into the dynamic risk profiles used by an adviser firm – there is a risk element in buying a single asset that means certain compliance and risk operations will not support it. The process also involves a number of different professionals and there can be several attaching costs that the client must be able to service.
“Clients should be aware that by holding their premises in a SIPP they are effectively handing over ownership and responsibility for the property to the SIPP trustees.”
SIPPs can be a double-edged sword as you will be responsible for making all your own investment choices.
Some SIPP providers may offer to manage your investments for you, taking away the direct burden, though this may come with additional charges and you will still need to keep your eyes peeled.
No pressure then!