Thinking of holding commercial property in a SIPP? – be aware of the pitfalls

Buy to Let investors frustrated by increased regulation and diminishing returns from residential portfolios have turned to commercial property. We talk to many new buyers in this market, usually testing the market with ‘semi-commercial’ properties (typically retail on ground floor and flats above) because they at least understand renting flats. The auction rooms have seen a significant increase in this part of the market.

Inevitably investors get advised to consider buying and holding commercial properties in a SIPP (Self-invested personal pension) and borrowing in the name of the SIPP, the type of deals that the High Street banks heavily promoted ‘before Humpty fell off the wall’ (because they could help set up the SIPP too). Today the market is not so easy, although it is still feasible to fund property this way.

The benefits of holding a commercial property in a SIPP are well documented and persuasive. Tax reliefs are good, with no tax on rental income or capital gain and where you are renting out the property the rental income is basically treated as a pension contribution. Many business owners have done well out of buying their companies premises in a SIPP and letting it to their own company as a tenant.

However, from our experience of raising debt here’s some pitfalls to be aware of:

  • There are complexities to such a structure and specialist advice is essential, which adds cost
  • SIPP providers are not all the same – some are not happy to accept commercial property, some can be very positive and give you a lot of quality advice and help as to how to do it.
  • It takes considerable time. The formalities associated with it usually cause significant delays in getting a transaction completed.
  • The SIPP can only borrow 50% of its net value. This means that unless you have an existing SIPP (to which you are adding a commercial property purchase) you can borrow at lower levels than normal.
  • It narrows the market for lenders – especially for deals sub £1m. Lenders don’t like the work and cost involved in setting up such loans so opt to lend only for larger cases.
  • Formalities are not just at set up stage; lenders will need to be involved with the SIPP Trustees during the term of the loan, such as if alterations are being made to a property.
  • Don’t do it too young. Once such an asset is in a SIPP it is there for your retirement income. We have seen younger property owners regret locking up capital in this way when they have trading opportunities.
  • You must avoid any ‘residential’ property, as this in breach of the regulations. Careful advice is needed on what constitutes ‘residential’. PDRS activity becomes a risk of course. The rules for semi-commercial properties demand care and the penalties for falling foul of HMRC on this can be severe.
  • Issues such as leasehold terms, payment of VAT and the need to keep ‘connected parties’ at arm’s length all add complexities which need advice from tax and property advisers.

We have access to good specialist lenders for SIPP loans, but insist that borrowers consider such purchases with great care and under advice.