SIPP's and Commercial Property

martinpike

I may have the chance to buy a small freehold hotel at some point over the next few years.

The current owners, who I trust implicitly, run it themselves with some part time help, and probably own it outright, are looking for a way to convert this asset into a retirement income.

I'm currently employed, and a higher rate taxpayer.

My current thinking is that I'd sell up and step into their shoes, running it myself with some help.

In selling up, I'd raise about 30% of the likely value.

A mate, who works in commercial property investment, mentioned that I could bring my pension funds into play, in that if I left employment I could transfer the funds into a SIPP and invest in the property from there. As of this moment, that would add another 20% of the value. I am fully aware that this is all my eggs in one basket, so no need to comment on that bit, although I do take some comfort that even if I turned out to be Basil Fawlty, the property itself is still worth money.

Also, if the purchase is a few years away, I could stick considerable overpayments into my pension fund, get the 40% tax top up, then invest that into the property. If this is possible, that could bring the original 20% of the value from the pension fund up to around 35%.

And that's as far as I've really thought.

Clearly I could borrow money from a bank etc, but I'm wondering whether there are better, more innovative solutions.

In an ideal world, we'd find a solution whereby I get to buy it from them on a phased basis, and in such a way that is tax efficient to both them and me.

Any pointers or thoughts (not advice, I know...lol) anyone has would be much appreciated.

My head is spinning...

Cheers.

martinpike

I've just read that hotels are 'unlikely' to qualify as commercial property within a SIPP.

Anyone got any more detail on that please?

Cheers.

DavidLaGuardia

Property permitted in SIPPs

1. Commercial Property – As with Pre A Day regulations, there is no change
with commercial property.
2. Hotels, including ownership of part or all the hotel, provided no part is
occupied by a member or connected person (see below), or they have a
right to occupy a part.
3. Student accommodation (e.g. a hall of residence but not flats or houses).
4. Care homes or prisons.
5. Purchase of land and development of residential property, or conversion
of a building to residential, provided the pension scheme disposes of the
property before the development or conversion is complete (e.g. in the UK
when the certificate of habitation is issued). This means the property must
be sold before it becomes habitable. In these cases there is a risk that the
transaction will be classified as trading, and have their profit taxed
accordingly.
6. The residential element of a commercial property, provided it is not
occupied by a pension scheme member or a connected person. For
example a shop with flat above, where the shop and flat are let to the
shopkeeper. The implication is that the shopkeeper must be in residence
at the point of purchase, and if they leave and are not replaced
simultaneously by another, then the property becomes taxable
immediately.
7. Residential elements of a commercial property which are occupied by an
employee as a condition of his or her employment (provided the employee
is not a member of the pension scheme or a connected person). If the
occupant changes and is no longer resident as a condition of employment,
the property automatically becomes a taxable property.

Investments That Will Incur Tax Charges
1. Direct purchases of residential property (and grounds) – defined as a
building or structure used or suitable for use as a dwelling.
2. Beach huts.
3. Time shares.
4. A lease of a hotel room with the right to stay there at a reduced or free
rate.
5. Shops with flats above (unless the flat has been sold on a long lease and
has a separate entrance, or is let to the shopkeeper – see point 6 above).
6. Development or conversion costs to convert property to residential (except
see point 5 above).
7. Ground rents relating to residential property, unless the lease is of no
value (e.g. peppercorn rent).
8. Property Limited Liability Partnerships.

alexifa

I did something very similar to this recently for a client who bought an office with some of his own money and some of his SIPP money. There are lots of tax-efficient ways of making this work for you but you really need detailed financial advice from an IFA and an accountant (working together). It took me over a year to sort everything out but it was well worth it for the client.

martinpike

Hi Alexifa,

Thanks for that.

Can you very briefly outline for me the benefits you refer to? Do they have to be of a certain value to make things worthwhile?

Cheers, Martin.