5 reasons business owners should consider a SIPP to buy commercial property
A Self Invested Personal Pension or a SIPP can purchase almost any form of commercial property depending on your SIPP provider’s own rules. The most common commercial property to be placed inside a SIPP is a Business Owner or Owners trading premises. SIPP providers are particularly keen on this type of property as the business owners are also the tenants they have a vested interest in the property.
There are plenty of good reasons to consider SIPPs for your commercial property purchase but here are 5 of the best:
1. To Save Tax
No-one wants to pay tax and there are plenty of good legitimate ways to reduce your tax bill, one of which is using a SIPP to purchase your trading premises. Once the property is held within a SIPP the company will pay a market rent to the SIPP which is a tax deductible expense. Within the SIPP itself the rent is received free of income tax.
When you sell the commercial property there will be no CGT payable and potentially no IHT on death and this makes buying your trading premises through your Self Invested Personal Pension incredibly tax efficient
2. Ability to raise funds
Getting commercial finance is not a straight forward process and requires a minimum deposit of around 30%. This leaves a loan-to-value of 70% and would still be considered quite high risk especially in Northern Ireland given the last few years.
A SIPP can borrow up to 50% of net scheme assets, so if you have £200,000 in your SIPP you can therefore buy a commercial property for around £285,000 after expenses (£100,000 of which would be a mortgage). In this circumstance the mortgage is restricted to 35% which makes the commercial mortgage quite low risk for the bank.
Not only that but SIPPs are not restricted in who they borrowing from, only that this must be on commercial terms, as such you can borrow the extra funds from a Business Angel, a friend, a family member even your own Business. This affords you a lot of flexibility in terms of your borrowing.
3. Pooled Investments
SIPPs can club together with other SIPPs held with the same provider, businesses and/or individuals to purchase commercial property. This provides added buying power, for instance a combination of 10 SIPPs, businesses or individuals with £100,000 each could buy a property for £1.5 million (£500,000 mortgage)
4. Future Development
The funds within the SIPP will build up over time from both contributions and on-going rental and along with investment growth this could lead to a considerable pot of money. Not only can the SIPP pay for development and improvement works to the commercial property, it can also be registered for VAT to claim the VAT costs back.
5. Asset Protection
We all know someone whose business has gone bust in the recession and it certainly brings home the risks involved with running your own business. If your commercial property is owned by your SIPP then it is ring fenced from creditors in any future Bankruptcy proceedings giving you an extra layer of security.
Of course there are disadvantages to investing in a commercial property through a SIPP and these must also be considered before making a decision. As such here are 5 disadvantages of investing in commercial property through a Self-Invested Personal Pension:
- As the Property will be legally owned by the SIPP, business owners can feel they have a lack of control
- The property cannot be used as collateral for future loans to the company
- As the company are will be the tenants it will have to pay a market rent
- On retirement of the investor and if the SIPP wishes to raise finance the property will need to be valued incurring additional costs for the SIPP
- The SIPP will lack diversification if the property represents the main asset of the SIPP
Image courtesy of VGB Studios on Flickr
THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE COMMERCIAL MORTGAGES.
THE FINANCIAL CONDUCT AUTHORITY DOES NOT PROVIDE OVERSIGHT OF TAXATION. LEVELS AND BASIS OF TAXATION MAY CHANGE AND ARE DEPENDENT ON PERSONAL CIRCUMSTANCES.