One of the attractions of SIPPs is that they can be used to invest and develop commercial property, such as offices, industrial units or shops. Your pension fund does not even have to be large enough to buy a property outright as you can borrow up to 50 per cent of the fund’s net value.
In other words, if it is worth £150,000, you could borrow another £75,000 to buy a property for around £225,000. The rent from the property can be used to cover the mortgage repayments. If there is no mortgage, the rent will remain in your SIPP fund and can be used for other investments.
However, it is important to bear in mind that the costs of buying and managing a property in a SIPP can be fairly hefty. SIPP providers typically quote fees of between £500 and £750 for property purchase and there will also be legal and valuation fees to pay. In addition, ongoing annual management charges will be payable.
It is not possible to invest directly in residential property via a SIPP, although a commercial property with a residential element such as a caretaker’s flat may be permitted.
An alternative for those who want to invest in residential property may be to do so via property syndicate or collective fund. These schemes are allowed within SIPPs providing they have at least 10 investors and own at least three different properties worth a minimum of £1m in total.
Not all SIPP providers will currently accept these schemes and before investing, you should look carefully at how they work. Find out the level of borrowing as this will increase the risk and the amount you may have to pay for the maintenance of the properties as well as the costs to be covered when there are ‘void’ periods between lettings. Most importantly of all, you should find out your options for selling your investment.
Other property-related schemes which may be available within a SIPP are buy-to-let hotel room investments in the UK. It has been suggested that similar schemes abroad including ski chalets may also be suitable but some leading SIPP providers still feel this is a grey area. As the trustee, your SIPP provider has the final say on what can go into your pension.
By far the greatest demand for property investment within a SIPP is from small business people who want to buy their own business premises. Changes to the pension rules in April 2006 mean such purchases are now possible even if the property is already owned by the investor or someone connected to them.
Buying your own business premises within a SIPP can have several tax advantages. The rent paid into your SIPP is free of tax because it is a tax deductible expense. There will be no capital gains tax to pay on the property when it is sold within the pension fund and if you die before age 75 and before you start drawing your pension, your beneficiaries can receive the proceeds of the sale of the property free of inheritance tax.
To find an Independent Financial Adviser that can advise on SIPPs call 0800 043 0725