SIPPs have long been associated with investment in commercial property and this is one of the reasons why there has been such growth in the market over the past 20 years.
Despite its popularity, commercial property investment within a SIPP is complicated. The types of investment can range from a single storey office and barristers’ chambers to more exotic properties such as a football ground or even a zoo.
Each year in England more than 40,000 commercial properties are acquired each with a value in excess of £40,000, but of these only around 1,000 will use a SIPP to acquire them.
There are many ways to hold commercial property within a SIPP; it can be done via a property fund, a syndicated property purchase or directly by the pension scheme. Many investors see commercial property as a safe haven with the continued volatility in the equity markets.
Historically investors have tended to buy a fully refurbished property, but there is a growing trend of investors now looking to gain investment returns by buying a property and then developing it using pension fund monies. As with the residential property market, there are many opportunities to purchase buildings that are run down and in need of renovation.
This can take many forms from a simple modernisation of a property to taking on an older building, restoring the period features and adding instant value to the SIPP as the value of the property increases.
One example of this is The Lodge, a property in Lancashire that was purchased by a SIPP in 2010. It was originally built in the 1850s as a public house, but came to the attention of a local financial adviser and one of his clients.
The client in this case was a property developer who was used to taking on large scale renovations, making The Lodge ideal as it had fallen into disrepair over many years and, if left for much longer, would have been beyond repair.
For many investors the thought of a major property renovation would be too much but with the right project team and detailed planning it is possible to bring it in on or under budget in a set timeframe, as was done with The Lodge.
The investor and the adviser are central to the project team. In the example of The Lodge, the investor’s prior experience of project management meant that a hands on approach could be taken, but that is not always the case.
The financial adviser’s role is to deal with the financial aspects of the purchase and renovation. This includes establishing the most suitable SIPP product and arranging for the pension funds to be transferred correctly and in accordance with current regulations.
This is crucial as the renovation is being carried out by the pension scheme and so care needs to be taken to ensure that it is the pension scheme, not the investor, that benefits from the works being undertaken.
Working together
The adviser will work with the investor to choose a SIPP provider that offers flexibility and has experience of property purchase. The provider will ensure that all actions taken are within pension legislation, especially when borrowing is involved.
They will also manage the funds for the development by settling the costs of the various parties involved.
The roles of the surveyor, solicitor, bank and contractors are also key. The work that they carry out is the same as for a normal property transaction and the fact that it is a purchase being made by a SIPP does not alter this.
Making the decision to invest and develop a commercial property within a SIPP is only the starting point. As with any property development there needs to be a clear vision and plan.
When dealing with a property in a state of decay, as with The Lodge, that plan needs to be comprehensive, detailing a definition of purpose for the building, blueprints and architect plans, the correct funding, additional contributions or transfers and borrowing, if required, as it is the SIPP that will meet the costs of development.
It is also important to have a comprehensive work plan, including scheduling utility suppliers. Consideration should also be given to any adjoining properties or access.
In addition, considering the VAT position is an important factor that will have consequences for reclamation of VAT during the development and then on any subsequent disposal.
It is during the renovation work that the role of the SIPP provider starts to come to life. As the owner of the property on behalf of the investor’s SIPP the provider will check that the work is appropriate and allowable for the pension, meaning that getting a SIPP provider with specific property and legal knowledge is key.
Once the development is agreed, along with the work schedule, many of the perceived barriers and complications disappear. The electrician or roofer does not care that a SIPP will be paying for the work instead of an individual or a business.
When The Lodge was transformed from a ruin in just under a year, a contemporary office environment was created comprising 12 workstations, a kitchen area, bathroom and shower facilities along with parking for six cars and a covered area for bicycles.
Business expenses
The completion of a renovation or development is just the start for a property purchased within a SIPP.
There are three main options available to the investor, firstly to occupy the building as a tenant. In many cases the investor also has a business and may have chosen the property to develop with this business in mind.
The company would pay a market rent to the SIPP that is normally relievable as a business expense, meaning that the investor’s pension profits.
Letting the building to an unconnected tenant is also an option, with the rent received going into the investor’s SIPP. This can deliver a longer term, stable rental income stream and with a good tenant in place comes an enhancement to the capital value of the property.
The final option is selling the building and investing in something else. Any gain made on the property from the renovation or development is free of capital gains tax within the SIPP.
In the case of The Lodge, the property value had increased by around £60,000. It is worth noting that trading within a SIPP is prohibited under HMRC guidelines and it is likely to view repeated property developments as trading, leading to the SIPP facing a hefty tax charge.
However, if the development work was conducted with the intention of holding the property as an investment and the disposal is a one off, HMRC is unlikely to be concerned.
Greg Kingston is head of marketing at Suffolk Life
