Putting a commercial property in a SIPP
A SIPP is a self-invested personal pension plan, which is available to individuals. A SIPP can be an attractive option as individuals have the opportunity to choose where their pension funds are invested rather than this decision being made by the fund manager.
The range of investments that can be held within a SIPP is wide and includes commercial (but not residential) property. It can be tax efficient to invest in a SIPP, particularly if the individual has a need for business premises.
Properties that can be held through a SIPP include offices, shops, business units, hotels and care homes. The fact that the property has a residential element, such as a shop with a flat above it, does not necessarily preclude the property from being held in a SIPP. The property will count as commercial property as long as the flat is not occupied by a member of the SIPP.
If the SIPP does not have sufficient funds to buy the property outright, the SIPP can borrow to fund the purchase. Rental income can be used to meet the loan repayments and associated interest.
Renting it to the business
The commercial property can be rented to a business run by the SIPP member, as long as rent is paid at a commercial level. This can be an efficient way of building up pension savings – instead of the business renting a property from a third party and paying the rent to them, the rent is paid into the SIPP, building up the pension savings. The SIPP also benefits from any capital appreciation on the property.
Harry runs a web design agency. He sets up a SIPP to save for his retirement and builds up some funds. He decides to invest in a unit on an industrial estate from which to run his business. The SIPP purchases the unit for £50,000, funded in part by a £20,000 loan.
The business rents the unit from the SIPP paying the market rent of £500 a month. The loan repayments and interest are paid from the rent and the balance of the rent builds up in the SIPP.
This is a win-win situation as Harry benefits from the rental income and any increase in value in the unit.
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