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?
There’s A Lot To Be Said For Buying Commercial Property With The Money In Your SIPP
Commercial Property Is Often Perfect For Professionals
When a professional uses the money in her (or his) SIPP 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. 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 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
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, 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
By way of a quick comparison, here are the main advantages and disadvantages of holding commercial property in a SIPP.
10 Advantages Of Commercial Property In A SIPP
- 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 or non-SIPP investors.
- Can be purchased in conjunction with other SIPP investors, such as work colleagues.
- The SIPP can borrow up to 50% of its value to acquire the commercial property.
- There is no individual or corporate liability on SIPP loans.
- On the SIPP holder’s death, it could be transferred to a beneficiary as a ‘death benefit’.
10 Disadvantages Of Commercial Property In A SIPP
- 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 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 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, 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 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 investment. Do you homework thoroughly, and you could be onto a winner.
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