Since self-invested personal pensions were announced by the then-chancellor Nigel Lawson in 1989, providing greater flexibility in investment choices, commercial property has continued to be a popular investment choice for clients with a Sipp.
This is also true of their counterpart, the small self-administered scheme.
In principle, investing in commercial property within a pension is a very simple transaction. The pension purchases a commercial property and benefits from the rental income paid by the tenant. When the property is sold, the proceeds of the sale, including any increase in value, are returned to the pension.
Tax advantages
One of the main drivers for clients to invest in commercial property via their pension are the tax advantages that are on offer.
One of the main advantages is that the Sipp or Ssas will not be liable to pay capital gains tax when the property is sold from the pension, all of the proceeds go into the Sipp or Ssas tax free, subject to fees and transaction costs.
An important point to note, however, is that as the pension is intended as a long-term investment vehicle, clients should avoid using a pension to renovate and then sell multiple properties to make profit.
This would be considered trading under HMRC regulations and can result in a scheme sanction charge arising against the pension.
A further tax advantage is that there is no tax payable on any rental income paid from the tenants into the Sipp or Ssas. Instead, once a tenant is secured and is paying rent to the pension, the rent goes back into the pension for onward investment and is treated as investment gain as opposed to income.
There may be further tax advantages if the client’s company is to be the pension fund’s tenant, as the rent should be deductible from the trading profits of the business, resulting in a potential corporation tax benefit for the tenant company.
These tax advantages are underpinned by the client finding a suitable commercial property for their pension to invest in. In order to see a return on investment, there needs to be a market to let and sell the property to. And of course, the value of the property needs to increase.
The Sipp or Ssas can acquire commercial property from the member or a party (including company) connected to them.
It is essential that any transaction undertaken involving a connected party takes place at market value. If the transaction takes place over or under market value, a tax charge could apply.
For those clients that operate their company from a commercial property that they own, they may see an additional benefit in transacting the property to their pension in that they could free up cash in the company with the sales proceeds, which they could use elsewhere.
The business would then pay rent at market value to the pension fund, who would be their landlord for the duration of their occupancy.
