Alternative Way Of Purchasing Commercial Property - SIPP Or SSAS
There are various tax issues which should be considered when undertaking commercial property purchase. A key aspect is how to undertake any such purchase. Of course these may be made personally, however, one should carefully examine the options to buy via a Limited Company or through a pension via a Self-Invested Personal Pension (SIPP) or Small Self-Administered Scheme (SSAS). Here we will take the opportunity of examining in some detail the option of utilising a pension for the purpose of commercial property investment.
Via the mechanism of self investment, commercial property in the UK may be purchased. This usually precludes any property with any residential element. Hotels, guest houses, pubs, etc will all require special consideration. Any property with an existing residential element which is to be converted to commercial use must be confirmed before the purchase is completed. Because of these restrictions, self investment is only suitable to commercial property investors and / or those seeking to invest into commercial property for purpose of running their own business from the premises. This provides an opportunity for rent to be paid into a proprietor’s own pension fund rather than to a third party. This could be a suitable solution for any pharmacist looking to purchase premises for their pharmacy business.
The purchase of any property is at the guidance and discretion of the SIPP or SSAS provider. Regardless of whether a property is acceptable in principle, acceptance or otherwise is subject to the professional opinion of the surveyor who will value the property and determine its condition and suitability.
A key criteria of the purchasing process is that the transaction must be carried out on an arms length basis at fair market value. This applies to both the purchase price and to rent. Of course in regards to the latter, it would not make sense to pay other than fair value as it is the pension plan holder who ultimately benefits.
Of course, where a property purchase is being planned in this fashion, the pension must have assets to form the consideration. Shortfalls can be satisfied either by way of additional contributions or by resorting to borrowing.
In regards to contributions, the pension simplification rules which became effective from 6th April 2006, commonly known as ‘A Day’, provided the opportunity to make substantial contributions into pensions. However, it is highly recommended that both individuals and employers seek advice in regards to contribution levels to ensure these are within allowable limits and are made in a tax efficient manner.
Borrowing may be an alternative option, however, the new post ‘A Day’ rules imposed reductions compared with the previous, more generous rules. Currently, the maximum borrowing limit is 50% of net scheme assets immediately prior to the borrowing taking place. This limit includes any existing borrowing. This can be illustrated in the example below: -
Mr Smith is a local pharmacist. The trustees of Mr Smith’s SIPP are proposing to purchase a commercial property of £500,000 + VAT (15%) = £575,000 to allow expansion of the pharmacy business.
Existing Pension Assets |
Value |
Cash account |
£350,000 |
Existing commercial property |
£750,000 |
less XYZ plc commercial loan |
£150,000 |
Net scheme assets
|
£950,000
|
50% of net scheme assets
|
£475,000
|
less XYZ plc commercial loan
|
£150,000
|
Maximum borrowing available
|
£325,000
|
In this instance, the cash balance together with a contribution of £225,000 may be considered to avoid further borrowing or the cash balance coupled with additional commercial funding of £225,000 will be permissible.
Despite what would appear to be many restrictions, there are significant upsides of purchasing property in this fashion. The capital growth and rental income within the pension is non-taxable and tax relief is available on contributions which may ultimately be directed to property purchase. Whilst pension benefits have not been drawn, the fund is exempt from Inheritance Tax (IHT) and when the investor reaches retirement, a tax-free cash lump sum of upto 25% of the fund is available, subject of course to sufficient liquidity in the underlying assets to fund this.
It is fair to say that there is no default option when it comes to property investment, as each will be appropriate to the individual circumstances and likely investment activity of the property investor. We would welcome the opportunity of discussing your specific needs and requirements and advising you accordingly. Please feel free to contact Steve Prosser in this regard.
Date of Article: 13th January 2009
