In terms of the benefits of using a Sipp to invest in property, the obvious plus is the offer of potentially strong capital growth, says Andy Leggett, head of Sipp business development at Barnett Waddingham.
As property is commonly held for a significant length of time, Mr Leggett says gains may be large. The yield on property tends to be higher than the dividends from funds and equities, he adds.
He continues that many business owners may benefit from buying their work premises through their pension, as this can make “significant amount of cash available to the business for investment”.
When it comes to tax any capital gain resulting from an increase in the value of the property is exempt from capital gains tax, says Martin Tilley, director of technical services for Dentons Pension Management.
Any rental income is exempt from income tax, he adds. If VAT applies to the purchase of a property, Mr Tilley says it is possible to register the Sipp and elect to tax in respect of the property and thus reclaim the tax on the purchase price and/or any landlord improvements.
“A well tenanted property can provide an attractive return well in excess of other fixed interest assets, with the potential for capital gain,” he says.
“A property held in a pension scheme is in a totally separate legal entity to the member and/or his company so it would be protected in the eventuality of financial distress of the member or the company.”
Where the investor is also the owner of the business renting the property from the Sipp, Barnett Waddingham’s Mr Leggett says there may also be benefits to the business as rent is an allowable business expense.
Owning a business property can also be useful for succession planning, says Rownamoor’s Robert Graves, where instead of purchasing via a number of individual Sipps a group Sipp or small self-administered scheme could be instead used to enable property ownership to remain unchanged.
Claire Trott, head of technical support of Talbot & Muir, adds the new death benefit rules will make investing in commercial property more popular for members even into their retirement, because it can be handed down the generations, tax free in some cases.
With the possibility of leaving the pension and the asset to a non dependent beneficiary as a pension fund, rather than paying it out as a lump sum, Ms Trott there is much greater scope to avoid the sale of the property on death.
On the downside, Mr Leggett says there are additional costs involved in buying and holding a property in a Sipp. As with any planned property purchase, he adds it can fall through but with a Sipp, the lost sunk costs are likely to be greater.
Plus a liquidity crunch, which could be caused by rent arrears or the absence of a tenant, could result in the investor having to contribute to the Sipp. In extreme cases, Mr Leggett says the Sipp investor may be forced to sell the property, for instance in the case of a few who have protection against the lifetime allowance which would be lost if they contributed.