6 February 2009

Commercial Property and your Pension

With investors increasingly looking for different ways to maximise their investments we are seeing more and more people transfer their commercial property to their Self Invested Personal Pension (SIPP). There are attractive tax saving advantages and the member, not the pension provider, determines how and where to invest the assets and money giving a lot more control.

The Pension regulations allow you to transfer into your SIPP a wide range of assets including Stocks, Shares, Investment Trusts, Cash, Ground Rents and Endowment Policies but for many investors one of the main attractions of a SIPP is the ability to transfer a commercial property and hold it on trust throughout the duration of your pension.

By transferring a commercial property to your SIPP you will be transferring the legal ownership to the pension trustees but you will remain the ultimate beneficiary because the value of the property and any associated income such as rent will be invested in your pension. Any property will be held by “The XYZ Pension Trust for the benefit of John Smith”.

You may think that the legal process of transferring a property into a pension trust whilst ensuring you are the ultimate beneficiary is a long, complicated and therefore expensive process. Whilst the transaction is more complex than most property transactions if you instruct a solicitor who has experience and knowledge of working with Pension Trusts and in particular SIPP’s the transaction can be completed within a short timescale thus keeping the legal costs to a minimum.

Your accountant or financial advisor will be able to discuss with you in detail the potential tax advantages and disadvantage of transferring your commercial property into a SIPP. If they haven’t suggested it to you already you should ask them for details of the potential savings you could make.

Ian Hubbard of Direct Financial Planning Limited adds:

“There are many advantages of transferring your commercial property to a SIPP; some of which are as follows:

  1. Tax relief on pension contributions made to your SIPP are applied at your highest rate of income tax.
  2. You can purchase or transfer a commercial property using your SIPP and use the property for your own business provided your business pays a commercial rent.
  3. You have the ability to purchase a property using funds already held in your SIPP that are made up from previous contributions that you have made or other assets within the SIPP you may wish to dispose off.
  4. Previously the Revenue limited your contributions based on a percentage of your earnings. This has now changed to a lifetime limit, consequently it is possible to make large pension contributions, attracting tax relief and then using the funds to purchase the property.
  5. Most banks will give mortgages to SIPP’s for the purchase of commercial property.
  6. When retirement comes, you can either draw an income from the SIPP, i.e. the rental income, or sell the property within the SIPP and purchase a different type of asset.
  7. Most assets within the SIPP grow free of tax (except the reclaim of income tax on any dividends).

There are of course some disadvantages and limitations that you must be aware of:

  1. If you already own the property and transfer it to the SIPP then you may incur a capital gains liability, however the revenue have recently scrapped the previous taper relief for capital gains and now charge a flat 18% Capital Gains Tax (CGT), which may be beneficial. With property prices at a low your CGT liability when transferring the property now will be much less than it would be if you were to wait until the prices rise.
  2. You cannot transfer a property which has any residential part, i.e. a mixed use property such as a shop or pub with residential accommodation.
  3. Any rental income will be paid to the SIPP, i.e. any surplus over mortgage payments remains in the SIPP (unless you are of pension age and can draw an income from the SIPP).
  4. Because of the flexibility the administration costs of running a SIPP can be higher than for example a personal pension plan.

You will see that the advantages far outweigh the disadvantages so now is the time to take action.”

Tony Dupreez is a solicitor and a member of the specialist commercial property team at commercial law firm Bright LLP based at the Tamar Science park and has experience in acting for clients who wish to transfer or purchase property using their SIPP. Tony can be contacted on 01752 764479 or by email Tony.Dupreez@Brightllp.co.uk

Ian Hubbard is an independent financial advisor at Direct Financial Planning Limited based on the Hoe and can offer products from the whole market place and is able to match the most suitable SIPP to your individual needs. Ian can be contacted on 01752 209400 or by email Ian.Hubbard@directfinancialplanning.co.uk