Several types of commercial property can be purchased and held in a Sipp, including business premises.
In this article we will take you through how holding business premises in a Sipp works and what you need to know about the technical process, as well as exploring the important question of what type of clients this particular Sipp asset is likely to be suitable for.
As the name implies, it essentially involves clients with their own business - typically those who own a small and medium enterprise (SMEs) - placing their company premises inside a Sipp.
In doing so, they can access their pension savings to use as business funding, as well as a range of tax benefits.
We will explore some of the opportunities and challenges in more detail shortly but first let’s look more closely at how the process works in practice.
How does it work?
There are two broad approaches to holding business premises in a Sipp.
One is the equity release model, where a business can place premises they already own into a Sipp, effectively exchanging the pension fund already accumulated for the property itself.
The other is the funded purchase model, where the property is purchased using the pension fund(s) and placed directly into the Sipp.
Both models are based on the rules governing Sipps allowing for commercial property to be held directly as an investment, including a company’s own premises.
In both cases the business owner can invest as much or as little of their Sipp in a property as they choose.
Both models also allow for the Sipp to borrow up to 50 per cent of its net value to fund the purchase, if the pension savings are insufficient, with the rental income used to cover the borrowing repayments.
There are some important differences in the process if it is a syndicate purchase (where the property is being bought with others with the same Sipp provider) or a joint purchase (where it is bought with others not using a Sipp).
For instance, where the cost of purchase is shared by several syndicate members there may be greater potential to buy larger properties, with the various members having the option of holding different proportions of the investment (and getting returns according to those proportions).
As far as the process is concerned, a syndicate arrangement means that before the property transaction gets underway, the members would have to enter a syndicate agreement that regulates and documents their relationship.
Joint purchases can be more complex, given the Sipp is only buying part of the property.
Most providers will consider taking on joint purchases where there is a personal or business connection with the member, but this can vary between different providers and the additional complexity can push costs up.