Adrian Boulding: Using a SIPP to buy Commercial Property

16 November 2023

It has been difficult to find good news to talk to clients about this year, with increased interest rates, the stock market going sideways and ongoing war in Europe and the Middle East.

The media has been full of stories about falling house prices and estate agents complaining that residential transactions are around a third down on normal volumes.

UK Commercial Property Prices

However, commercial property has suffered even more, after being hit by both higher interest rates and the rise of ‘new normal’ working patterns, which have reduced demand for office space substantially. The UK property consultancy Carter Jonas provides a regular market outlook and has noted commercial property prices have fallen by around a fifth over the last year.

But could these lower prices have brought commercial property within the bounds of affordability for client pension plans?

Using a SIPP to buy Commercial Property

A SIPP can borrow 50% of the net fund value from a regulated high street lender in order to acquire commercial property. Paired with the Sipp assets, this means a commercial property could be purchased at up to one and a half times the amount currently in your client’s Sipp. By putting the Sipp assets to work alongside the loan to purchase a commercial property, the resulting mortgage will have a very low loan-to-value ratio, making it an attractive prospect for banks to lend against even in the current market conditions.

This could be an opportune moment for professionals to use their Sipp to acquire the premises their business works from. If buying on the open market, they won’t experience much competition, with Carter Jonas reporting volumes of commercial property transactions now at their weakest in a decade and 45% below the five-year average.

Ownership & Capital Gains Tax

In some cases, a client may already own the property they work from but own it directly rather than inside their pension. In this instance, they can still sell it to their Sipp, and it is an HM Revenue & Customs requirement that the sale must be conducted at the open market price.

In this case, it’s an opportunity to check back to when the property was originally acquired and consider the issue of capital gains tax. The recent falls in commercial property values could mean it can be moved into the Sipp today at a low price, reducing the capital gains liability to the client.

For either of these routes, the client’s Sipp acquires an asset with a sitting tenant at a potentially great price. The Sipp will enjoy the monthly rent – which again must be at a market level – tax free and also have no capital gains tax liability on further appreciation when eventually the time comes to move the asset on to another owner.

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