Alliance Trust Savings’ Steve Latto explains the advantages of small business owners purchasing their commercial property to hold within a SIPP.

Continuing stock market volatility means commercial property may again be an attractive alternative for pension investors looking for an investment that can provide a steady return.

By far the biggest demand for such an investment to be held within a self-invested personal pension (SIPP) comes from the small business owner who wants to own their property.

The advantages

Holding business premises within a SIPP gives certain tax advantages:

• The rent paid to the SIPP is tax free because it is normally an allowable business expense;
• On the eventual sale of the property, it will be free from any CGT payable on any gain made.

Commercial property anywhere in the world can be held under a SIPP. This does not just extend to the normal bricks and mortar acquisitions like offices or industrial units but can also include:

• Land (including farmland);
• Car parks;
• Jails;
• Golf courses;
• Purchase options

Even if the SIPP does not have sufficient cash within it to enable a property purchase to be made outright, there are other ways a purchase could proceed. This could mean the SIPP borrowing funds, joining with others to make a joint purchase, or a combination of both. Alternatively, the SIPP could just purchase part of the property with the current owner retaining the balance.

These options need to be covered in a bit more detail.

Borrowing

The maximum a SIPP can borrow is up to 50% of the net value of the SIPP fund immediately prior to the borrowing taking place. The value of the property being purchased using the borrowing cannot be taken into account when calculating the value of the fund.

The 50% limit is the total amount the SIPP can borrow. There is no separate limit to fund a liability for VAT. In other words, if the SIPP is worth £180,000, it could borrow another £90,000 to enable it to buy a property with a total cost, including charges and VAT, of up to £270,000.

Joint investments

It is possible for a group of members of the SIPP to jointly purchase a commercial property. It is also possible to buy out a member’s share of the property.

The SIPP may jointly own commercial property with any other party, including the member or any other connected person/company.