Butchers, Bakers and Candlestick-Makers tend not to do it, so why do Doctors, Dentists, Lawyers and Accountants often put commercial property in their SIPPs and SSAS?
There’s A Lot To Be Said For Buying Commercial Property With The Money In Your SIPP Or SSAS
Commercial Property Is Often Perfect For Professionals
When a professional uses the money in her (or his) SIPP or SSAS to buy the commercial property from which she trades, her business benefits because it releases capital for investment elsewhere. The rent paid by the business reduces the taxable income of the business, and at the same time, it’s tax free when it’s received in the SIPP or SSAS. Any capital gain in the value of the commercial property is also free of tax.
As both parties are related, risk is reduced in both directions. The business has a stable landlord who has no interest in selling up. The landlord has a stable tenant in whom she can rely upon to pay the rent.
It’s no surprise the twin advantages of tax efficiency and risk reduction attract many professionals to use their SIPPs or SSAS to purchase the commercial property from where they run their businesses. But it gets a little less certain when there’s no direction relation between landlord and tenant.
If You’re Contemplating Commercial Property For Your SIPP Or SSAS
The commercial property market has suffered in recent years. Wander along many high streets in the UK and you’ll see the evidence. Empty properties. A profusion of charity shops, pawn brokers and betting establishments. It’s not much better on the industrial estates and business parks, with plenty of places available to rent.
Despite the recovering economy, it might well be a while before you see a capital gain on commercial property. However, if you’re prepared to wait - and when it comes to SIPPs or SSAS, you could well be planning to hold the commercial property for a long time - you might be able to buy some very competitively priced properties right now. Though whether you can find reliable tenants for them is another matter.
It costs money to hold commercial property. Generally speaking, it costs more to hold it via a SIPP than either personally or via a company. Not only will your SIPP operator charge fees when you acquire it, it’ll charge you yearly costs too. So if you don’t have a tenant, or your SIPP has borrowed money to acquire the commercial property in the first place, you might have to raid other parts of your SIPP to retain it. And that can reduce the overall return on your money.
The Pros And Cons Of Commercial Property In A SIPP Or SSAS
By way of a quick comparison, here are the main advantages and disadvantages of holding commercial property in a SIPP or SSAS.
10 Advantages Of Commercial Property In A SIPP Or SSAS
- No Income Tax on rents received.
- No Capital Gains Tax on the sale of the property.
- It falls outside of your estate for Inheritance Tax purposes.
- It’s not accessible to creditors in the event of personal or business bankruptcy.
- Releases capital back into the business to help with cashflow.
- Part or all of it can be sold at any time to SIPP, SSAS or non-SIPP or non-SSAS investors.
- Can be purchased in conjunction with other SIPP investors, such as work colleagues (a SSAS is more cost effective for this as there is just one pension scheme for your business rather than a collection of individual SIPPs for each of you).
- The SIPP or SSAS can borrow up to 50 per cent of its value to acquire the commercial property.
- There is no individual or corporate liability on SIPP or SSAS loans.
- On the SIPP or SSAS holder’s death, it could be transferred to a beneficiary as a ‘death benefit’.
10 Disadvantages Of Commercial Property In A SIPP Or SSAS
- It can’t be used as collateral for any loans to the firm.
- The firm in occupation must pay market rent, even if it’s your own business.
- The SIPP or SSAS operator is obliged to chase rent, even if it’s your own business.
- Regular revaluations are required which incur cost.
- It may have to be sold at an inopportune time (eg death, to pay retirement benefits).
- SIPP or SSAS loans tend to be short term, which can make them expensive.
- Interest on any borrowing doesn’t qualify for tax relief.
- Property expenses will be due, whether or not a tenant is in place.
- If it’s the primary asset of the SIPP or SSAS, it could leave the investments poorly diversified.
- It’s generally an illiquid asset, which could take months or years to sell at the right price.
Commercial Property Can Be A Good Long Term Bet
You can find more about holding commercial property in a SIPP or SSAS on the SIPPclub commercial property page, including a useful case study showing how it works in practice.
Despite the fact that this asset class has suffered appreciably in recent years, there’s no doubt that the right commercial property will always deliver both reasonable rental yields and decent capital appreciation. So keep an open mind, for it’s exactly like any other SIPP or SSAS investment. Do you homework thoroughly, and you could be onto a winner.
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AJ Bell Is Often The Best Value SIPP For Stockmarket Assets
Over time, charges can wipe out a huge part of your fund. We like AJ Bell because there are no set-up costs. If you hold passive funds, which is our preference, or shares, investment trusts, EFTs, gilts or bonds, you pay one small fixed fee no matter how large your fund. And when you come to draw your benefits either as occasional drawdown or UFPLS payments, there's a small charge for the whole year no matter how many times you access your money (many SIPP and SSAS providers charge more than this for each payment). However, you should always compare charges in detail, because AJ Bell could be more expensive than other providers, depending on the type of stockmarket assets you hold.
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As SIPPclub neither advises on, nor arranges, nor recommends specific investments or strategies, we're unable to say whether a SIPP or SSAS or any investment within it is right for you. Ultimately, it’s your money and your decision, and you should only proceed once you're satisfied you've undertaken sufficient due diligence. If you need advice, you should speak to your trusted adviser, or you could find a local adviser from Unbiased.co.uk. Alternatively, we'd be pleased to introduce to a suitably qualified independent financial adviser.
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