Property appeal

The SIPP framework lends itself to people who want to take control of investments and diversify their assets. Commercial property is an attractive choice for many SIPP members, whether they are intending to run their business from the premises or simply include the property in their portfolio of investments.

SIPP members can invest in the majority of commercial properties. Either freehold or leasehold properties can be acceptable investments and these include shops, offices, warehouses, industrial and business units, hotels, public houses, leisure complexes and land. It is important to select a SIPP administrator who has extensive experience of property purchase transactions.  

A commercial property which has a residential element that is occupied by an unconnected party as part of their contract of employment (such as a flat above a shop) or property that is used in connection with the business premises (such as a caretaker's flat) would be permitted under the tax rules. However, residential property generally is not permitted without punitive tax charges on the member personally and their SIPP.

It is important to remember that some types of investment such as commercial property may not be readily realisable and this may influence when you would like to take your pension benefits (and indeed when and how we provide benefits on your death; this is particularly relevant after age 75, see fact sheets on death benefits and alternatively secured pension).

If we buy from or sell assets to the SIPP member or a person connected to them, the transaction must be at market value, supported by an independent valuation provided by a suitably qualified valuer.

Some of the key attractions of commercial property investments are:

• The property, when sold, is free of capital gains tax (CGT)
• There is no limit on the number of properties which can be purchased (providing funds are available)
• Borrowing is allowable to assist in the purchase
• Legal costs and expenses may be payable from the SIPP (except stamp duty land tax)
• Rental income is paid gross into the SIPP
• VAT may be reclaimable by the SIPP if the property is VAT registered
• The ability to buy a property from which the member can operate their business, without this being a significant outlay to the company (although the member's business must pay a commercial rent to the SIPP)
• The SIPP can purchase commercial property that the member, or their business, already owns (provided the price is at market value)
• The member does not have to sell the property when they decide to draw a pension from the SIPP
• The member or their employer can use a commercial property instead of cash when making a tax relievable contribution to the SIPP
• Pointon York SIPP Solutions is prepared to jointly own commercial property with the member, or their business, provided certain conditions are met

SIPP members can ensure joint ownership of commercial property in various ways:

Borrowing
Borrowing is allowable under HMRC rules to assist in the property purchase (this can now be for any investment purpose not just commercial property).

HMRC limits the borrowing by each member's ‘arrangement' to 50% of the net fund value of the SIPP, less any existing borrowing. 

If the borrowing limit is breached, the SIPP will become liable to a 40% tax charge on the excess (called a ‘scheme sanction charge').

Where a property is transferring from another SIPP (or SSAS) to The PY SIPP, we must ensure that the existing borrowing is within the 50% of net fund value limit.

Contribution in specie
A contribution to a SIPP may potentially be made by transferring an asset such as a commercial property "in specie". However, this is not just a simple transfer of the property. A specialist SIPP provider will have the appropriate legal documentation to facilitate this transaction.

Property abroad
When buying property abroad, it is important to note that each transaction will be different as each country has different laws and legislation. 

To protect the interests of both the members and SIPP administrators, we will instruct professionals who are specialists in the relevant country to act on behalf of the scheme. Documents would need to be translated into English (where the country has a foreign language) and the same tests will be applied to overseas property purchase as to those in the UK, i.e. no residential property is permitted (see above), a valuation of the capital and rental values will be required and local searches/clean environmental reports will also be necessary. 

Land
Land held in a registered pension scheme is a permitted investment. However, there may be issues where: the land is adjacent to the member's own property, the land is not already tenanted, you propose to develop the land for residential development, you are a property developer, or you intend to use the land.

Property funds
SIPP funds may invest in unit trusts, limited partnerships, REITs or limited liability companies which invest in commercial or residential properties, either in the UK or abroad. 

Hotels and hotel rooms
If a pension scheme owns the entirety of a hotel, or is a joint owner of all of the hotel then this is not residential property. However, there are four main issues to be considered regarding a direct investment in an apart/hotel or hotel room before we could proceed with our usual requirements for property purchase.

• The hotel should have the usual facilities one would expect of a hotel
• There must be no right of occupancy at the hotel or any other property by anyone either now or in the future whether this is explicitly provided for in writing or not
• The SIPP is unable to own any furniture as this would be ‘tangible moveable property'
• There must be no income from ancillary facilities of the hotel, such as the bar or room service

Christine Hallett is chief executive of Pointon York SIPP Solutions. For further details on any of the above, please call 01858 419300 or visit www.sippsolutions.com