Should you use your SIPP to buy commercial premises?
Partner and Commercial Property lawyer Helen Willett says that using a Self-Invested Personal Pension (SIPP) to buy a commercial property can work well, as long as you understand the risks.
More business owners are choosing to use the money invested in their private pensions to buy a new premises, or the commercial premises from which the business currently operates. This can be a good option, as long as you are aware of the potential pitfalls.
The benefits of using your pension fund to buy commercial property
A key attraction of using a Self-Invested Personal Pension (SIPP) to invest in commercial property is that any growth in the property value is free from capital gains tax. Whether or not a property gains in value is, of course, subject to the vagaries of the property market at the time.
If the business leases the property from the SIPP, the rent the business pays is an allowable business expense and the pension pot also gets a tax free rental income.
Another non-financial advantage (where the landlord and tenant are related) is that there is almost no risk of instability in the landlord and tenant relationship.
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The potential pitfalls of a SIPP
While these benefits are attractive, you should get advice from a solicitor who has relevant experience of dealing with these types of transactions because there are legal peculiarities around SIPPs. Here are the top five issues to be aware of.
1. It may limit your buying options
While many buyers are prepared to take a commercial view on issues such as environmental risk, lack of formal rights of access or flood risk, pension funds will not take such risks. That means your provider may prevent you from buying certain properties.
2. You will lose some control
The property will be tied up in a formal arrangement whereby you can’t deal with the asset without the involvement of the trustees. So, you will also lose an element of control, which can be frustrating.
3. You will need a lease
The occupation of the premises will need to be formalised with a lease so that rent is payable into the pension fund, even if the pension owner effectively owns or controls the business that occupies the property. Each pension provider will have its own specific requirements.
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4. Your pension assets are no longer under your direct control
Most of the legal issues that arise when buying commercial property through a pension result from the fact that that the pension assets are no longer under the direct control of the pension owner. This means that the pension trustees will have regulations which govern the way in which the property is acquired and held. Your solicitor should be able to talk through the implications of this.
5. You will incur expenses
Holding any property comes with expenses and your SIPP will charge you to acquire any property and there will be ongoing charges. You need to be sure that these charges are outweighed by the benefits of holding the property in the SIPP
A SIPP can be a good option but it doesn’t work for everyone. Before deciding on whether or not to invest in commercial property through a SIPP, seek legal advice so you know that this is the right decision for the future, as well as for your business now.