Commercial Property in a SIPP

blunkmore

Any experts on this?

I have a shop and a flat which, although one property in the deeds, are rented out separately as investments. I own both jointly with my wife.

My wife and I are both likely to be higher rate tax payers for the next couple of years as we will be taking some dividends.

I understand that I can get tax relief on contributions to a pension fund up to the amount earned in that year. The shop is probably worth £120k so if we earned £60k each in that year, we would pay no income tax? The shop rents currently for £12k PA

So... I am thinking that I should legally divide the shop and flat and transfer the shop into our funds.

Questions...

Can our individual SIPPs own half a shop each?
Is it possible to remortgage the shop within the pension fund to buy another shop in the future?
Any obvious pitfalls with this plan?
I assume that our funds would be free to invest the accrued rent in stocks, other commercial property, etc. - correct?

Thanks for any info.

Blunkmore

CannySaver_2

Hi

In answer to your questions:

Can our individual SIPPs own half a shop each?

The two can jointly own the property, you could also use a SSAS, where you would both be members and the SSAS owns the whole property. A SSAS is often seen as the poor relation to a SIPP, however it can sometimes be cheaper when there are multiple plans owning one property.

Is it possible to remortgage the shop within the pension fund to buy another shop in the future?

Yes, a SIPP can borrow up to 50% of the scheme's assets, this could then be used to help buy a further shop (or any commercial property come to that), you can also borrow against the new shop too. The new shop would obviously also need to be held inside the SIPPs.

Any obvious pitfalls with this plan?

Always downsides to any investment, you are putting all your pension eggs in the commercial property basket, if your business moves on or fails how easy would it be to rent out the property? When the shop is sold or contributed on an in specie basis to the pension there could be tax to pay depending on who currently owns the shop and whether a profit has been made. These are just a couple of the downsides, however there are of course plenty of upsides, tax relief on contributions, no tax to pay on growth in value of the property, no tax to pay on the rent (which you can still offset against the business profits as an expense).

I assume that our funds would be free to invest the accrued rent in stocks, other commercial property, etc. - correct?

Correct

The link below takes you to a website showing which SIPP providers will allow commercial property purchase:

http://www.!!!!!!.uk/sipp-zone/help-choosing-your-sipp/commercial-property/

I hope this helps

The Canny Saver

thenudeone

It is possible to invest SIPP funds in commercial property and even borrow additional funds but such a SIP is a high end product with fees to match. There are several specialist SIPP providers who market such SIPPs but my guess is that for a property of this value, the fees may be disproportionately high, especially if the property is to be owned by two separate SIPPs (such a scheme might be possible by the SIPPs holding shares in a holding company which owns the property, but at additional cost).

Don't be led into an investment like this just because of the tax breaks. Remember that you can get the same tax relief if you invested your pension fund in a mass-market SIPP offering a fund invested in commercial property or other asset classes. If you invest all your income in one year you'll only get 40% tax relief on the higher rate slice of your income, and won't get any tax relief at all on the last £7.5k which is tax-free anyway. You could maximise your tax benefits by spreading the contributions out and each investing just enough in a SIPP each year to bring your net income down below the higher rate threshold.

blunkmore

Thanks both.

We do not have a business which occupies the shop. It is rented to a retailer on a long secure lease and would be in relatively high demand if vacant.

I make money in residential property development and in sporadic lump sums, not as a steady flow of income so i feel i am particularly suited to putting money aside in lumps like this, particularly in years where there is a large taxable income (my wife is a shareholder in the two companies which I currently operate so we can both take dividends). I also understand property a lot beter than i understand shares or funds andi have a team who can crry out maintenance, improvements, etc. I also know how to find a deal, sell well, deal with tenants, agents, councils, etc.

I don't know what an SSAS is but I'll look it up now. And I'll have a look at that link.

Further thoughts appreciated.

Many thanks,

B

blunkmore

It also seems that the annual allowance of 50k means that the maximum the we could enjoy tax relief on would be 100k between us, leading to the question...

If a commercial property asset is owned by us privately and it is valued at, say 250k, can we transfer portions of it into our funds in different years?

Thanks,

B

CannySaver_2

blunkmore wrote: »

It also seems that the annual allowance of 50k means that the maximum the we could enjoy tax relief on would be 100k between us, leading to the question...

If a commercial property asset is owned by us privately and it is valued at, say 250k, can we transfer portions of it into our funds in different years?

Thanks,

B

Hi

Yes, you can transfer proportions each year, you can also take advantage of carry forward, which means you can use up unused allowances from previous tax years, providing you have the earnings to justify it in this tax year. For example if you earned £70k in 2011/12 in pensionable income, you could make a £50k contribution for this year and then an extra £20k offset against previous year's unused allowances.

Hope this helps.

The Canny Saver

CannySaver_2

thenudeone wrote: »

It is possible to invest SIPP funds in commercial property and even borrow additional funds but such a SIP is a high end product with fees to match. There are several specialist SIPP providers who market such SIPPs but my guess is that for a property of this value, the fees may be disproportionately high, especially if the property is to be owned by two separate SIPPs (such a scheme might be possible by the SIPPs holding shares in a holding company which owns the property, but at additional cost).

Don't be led into an investment like this just because of the tax breaks. Remember that you can get the same tax relief if you invested your pension fund in a mass-market SIPP offering a fund invested in commercial property or other asset classes. If you invest all your income in one year you'll only get 40% tax relief on the higher rate slice of your income, and won't get any tax relief at all on the last £7.5k which is tax-free anyway. You could maximise your tax benefits by spreading the contributions out and each investing just enough in a SIPP each year to bring your net income down below the higher rate threshold.

Hi

A few points here:

1. It is not possible for a SIPP to own the shares of a holding company as a SIPP cannot control a company, if 50% of the shares were owned by the OP and 50% by the OP's wife, who is a connected party, then the SIPPs would control the company, which is not allowed

2. With regard to charges I would suggest that a SIPP could actually be cheaper than investing in a fund. Let's compare two options. The Aviva Property Trust, which has a lengthy track record, holds nearly £2 billion of property and is well diversified, has a TER of 2% pa if bought through HL. That would give an annual charge of £2,400 looking at a £120,000 investment which the OP is.

Now, compare that to a SIPP, for my figures I am using IPM as an example as they make no additional annual charge, over and above the normal SIPP charge, for holding a property.

http://www.!!!!!!.uk/sipp-zone/sipps/ipm/

NB VAT is charged in addition to these fees, the SIPP could of course choose to be VAT registered to claim this back

Set up costs:

SIPP: None

Property purchase: £450 per property = £900, £100 for a lease, total £1,000

In addition there would be legal costs for the purchase, I would suggest these would be circa £1,000

Annual charges:

SIPP: £540 x 2 = £1,080

So, in the first year the costs would be circa £3,080, about £680 more than the fund route, however every year afterwards the SIPP is cheaper, by around 50%. This is simply the benefit of fixed fees compared to the percentage fees charged by fund managers.

3. "You won't get any tax relief on the last £7.5k which is tax free anyway" I don't understand this point. Isn't tax relief is payable on any pension contribution, up to the maximum, including an contribution made under the carry forward rules?

4. Investing in a commercial property fund is one option, it does provide the benefit of diversification between different geographical areas and is a way of dipping ones toe into this market. However, a couple of disadvantages, the charges can be more as illustrated above, not each property fund is a bricks and mortar fund, many invest in shares of property companies, they cannot be geared as the OP can do with his own SIPP, and the yield's are generally poor (the yield on the Aviva fund is just 2.7%)

I hope this helps.

The Canny Saver

thenudeone

CannySaver wrote: »

3. "You won't get any tax relief on the last £7.5k which is tax free anyway" I don't understand this point. Isn't tax relief is payable on any pension contribution, up to the maximum, including an contribution made under the carry forward rules?

I am veering outside my area of knowledge here but doesn't the three year carry forward rule relate to the £50k contribution limit rather than the tax relief?
http://www.hmrc.gov.uk/pensionschemes/annual-allowance/carry-forward.htm

To put it simply, If you have £50k pa income for two years, would you not pay less tax if you paid £25k pa into a pension each of the two years (so that your net income was £25k each year (i.e. a basic rate taxpayer both years) rather than £50k in year 1 and nil in year 2?

option 1: £25k pa pension contribution
earnings and tax for both year 1 and year 2
7.5k at 0% tax
17.5k at 20% tax = £3.5k
total tax for 2 years = £7k

option 2: £50k contribution in year 1 only
year 1: net income 0. tax 0 (since 100% of £50k paid to pension)
year 2:
7.5k at 0% tax
35k at 20% tax = £7k
7.5k at 40% tax = £3k
Total tax for 2 years = £10k

Bringing forward all of the contribution into year 1 costs an extra £3k in tax.

thenudeone

Of course, it may possible to hold the property in a Group SIPP (with the two of you as the members) such as this one http://www.curtisbanks.co.uk/group-sipp.html