SIPP & commercial property

SirSnogALot

Hi There,

Trying to learn about pensions and in particularly about SIPPS.

As I understand it, the maximum you can contribute into a pension (or SIPP) tax efficiently is £40k per annum, with a lifetime total of £1m.

I also understand you can put commercial property assets in a SIPP and use the income to invest into other things. And you can match your cash contribution towards an asset with 50% debt.

PROPERTY ASSET EXAMPLE:

Lets say I owned a retail unit of 3k Sq/Ft.

Which achieved £18 PSF on a 20 year lease, giving approx. income of £54k PA, capitalised at 7% = £750k asset value on a 999yr lease.

ASSUMPTION 1:

If you could simply transfer the ownership of an asset into your SIPP, this would be considered a contribution.

So you could either transfer £40k of shares for 19 years or get taxed for the difference above your annual contribution limit. Probably not wise either way.

ASSUMPTION 2:

If you acquire with cash, it is not considered a contribution, so you could add a debt instrument to increase your buying power and this doesn’t count towards your annual or total contribution limits?

I.e. you could use your £40k contribution + debt instrument to acquire £80k of shares year 1.

The following year you could use your contribution limit, plus some or all of the rent from the previous year. Year 2: £80k + £11.8k (£5.9k rent + debt), which would grow year on year with the higher level of ownership.

That being the case, I calculate 7 years would be the quickest you could transfer full ownership of the example asset to your pension (assuming you used all the cash + debt resources available to acquire it).

Year 1 = 11%
Year 2 = 12%
Year 3 = 14%
Year 4 = 16%
Year 5 = 18%
Year 6 = 21%
Year 7 = 8%


Do I understand it correctly?

Thank you in advance,

Cheers :beer:

Sir SnogALot

System

SirSnogALot wrote: »

If you acquire with cash, it is not considered a contribution,

I don't think that is true. A contribution is a contribution however it is made, and the restrictions apply.

You can increase the rate of contribution, whether in cash or kind, if you are eligible to use carry forward of up to 3 years unused allowances, assuming you have the earned income to support them.
If they are company contributions, eg you are a director, then the company can potentially offset the costs against corporation tax.
You need professional advice if using that route.

You can get a mortgage on a commercial property in a SIPP, subject to the provider allowing it. But I think not many do now, and the rules may have changed.

coyrls

SirSnogALot wrote: »

Hi There,

As I understand it, the maximum you can contribute into a pension (or SIPP) tax efficiently is £40k per annum, with a lifetime total of £1m.

The maximum you can contribute is lower of £40K or your relevant earnings. You can roll up unused £40K allowances from three previous years but your contribution in any year can't exceed your relevant earnings.

The £1M Life Time Allowance is not the total contributions to a pension, it is a limit on the value of a pension at crystalisation and at other events, with tax being applied on the excess.

AnotherJoe

There are several posts in here spattered with the financial wreckage of those who thought investing in a commercial property was a good idea.

Two main issues;
1) All your eggs in one basket. No one would advise that your SIPP consist only of (say) Vodafone or Rolls Royce or Google or any other single company's shares. Far too risky. But that's exactly what you are doing if you invest in one property.

2) Property is highly illiquid. So, when you want your money, you most likely cant sell off a fraction of it, and also if the market is poor when you come to sell, you might not be able to sell except at a huge forced loss. A bit like happened recently with property funds.

System

Those are good points. But different considerations might apply if:

It's your own company's premises
You have a controlling interest in the tenant
Your company gains tax advantages from selling and leasing back
You have no intention of selling, and are content to draw what might be a high-return rent.
You intend to pass the SIPP on by inheritance
You have invested accumulated company profits, not your own cash.

AnotherJoe

Clifford_Pope wrote: »

Those are good points. But different considerations might apply if:

It's your own company's premises So its not just the eggs but the chickens as well in the one basket?
You have a controlling interest in the tenant Still the eggs and chicken issue.
Your company gains tax advantages from selling and leasing back Fair enough but doe sthat compensate for such a high risk?
You have no intention of selling, and are content to draw what might be a high-return rent. You may have no "intention" but you may need to
You intend to pass the SIPP on by inheritance So you dont care if the money is lost? Fair enough.
You have invested accumulated company profits, not your own cash.

If its your company, and I'm thinking small business here, then long term it is your cash. (or even big business if your initials are P G.

SirSnogALot

AnotherJoe wrote: »

There are several posts in here spattered with the financial wreckage of those who thought investing in a commercial property was a good idea.

Two main issues;
1) All your eggs in one basket. No one would advise that your SIPP consist only of (say) Vodafone or Rolls Royce or Google or any other single company's shares. Far too risky. But that's exactly what you are doing if you invest in one property.

2) Property is highly illiquid. So, when you want your money, you most likely cant sell off a fraction of it, and also if the market is poor when you come to sell, you might not be able to sell except at a huge forced loss. A bit like happened recently with property funds.

That all makes sense, I work in property so I know it pretty well and will invest in these anyway, just exploring if it would be an option to put one in a SIPP for the income, which could in turn be re-invested.

So we'd own the whole thing and could sell it off, with the shares being distributed to the owners, i.e. some within the SIPP and the rest via our LTD company etc.

If you have a 15-20 year lease from a covenant like Tesco, it is fairly unlikely they'll default. And provided you've done your research properly most likely they'll renew at the end, but risk they don't of course.

Of course, in the case of a catastrophic the value of that asset might go down, but my Fathers traditional pension reduced over half in 2008, so it isn't like traditional investment doesn't come without risks.

Clifford_Pope wrote: »

Those are good points. But different considerations might apply if:

It's your own company's premises
You have a controlling interest in the tenant
Your company gains tax advantages from selling and leasing back
You have no intention of selling, and are content to draw what might be a high-return rent.
You intend to pass the SIPP on by inheritance
You have invested accumulated company profits, not your own cash.

The asset would be owned by a LTD company I own but not as premises, its the commercial element of a mixed use residential development.

Clifford_Pope wrote: »

I don't think that is true. A contribution is a contribution however it is made, and the restrictions apply.

You can increase the rate of contribution, whether in cash or kind, if you are eligible to use carry forward of up to 3 years unused allowances, assuming you have the earned income to support them.
If they are company contributions, eg you are a director, then the company can potentially offset the costs against corporation tax.
You need professional advice if using that route.

You can get a mortgage on a commercial property in a SIPP, subject to the provider allowing it. But I think not many do now, and the rules may have changed.

Great, thank you all for your input, very helpful.

AnotherJoe

SirSnogALot wrote: »

my Fathers traditional pension reduced over half in 2008, so it isn't like traditional investment doesn't come without risks.

Still far higher risk because, yes the whole stock market can (and will) crash at points (at that point so will the value of your property of course). But you are sidestepping the entirely separate risk of having your whole pension invested in just one business.

A better analogy would be if your fathers pension contained only Tesco shares.
Then it would be subject to sudden variations outside of the normal stock market fluctuations.

Malthusian

SirSnogALot wrote: »

Of course, in the case of a catastrophic the value of that asset might go down, but my Fathers traditional pension reduced over half in 2008, so it isn't like traditional investment doesn't come without risks.

Assuming your father's pension was traditionally invested in a sensibly diversified portfolio, it would have recovered its value by 2012 and continued growing.

Losses when investing in single properties can be total and permanent.

If you have a 15-20 year lease from a covenant like Tesco, it is fairly unlikely they'll default.

About as unlikely as a similarly large retailer like BHS defaulting.

It's not necessarily a bad idea but you do need to go into it with eyes open, and knowing what you'd do if it didn't work out and both the company and the pension fund went down the tubes.

System

Malthusian wrote: »

both the company and the pension fund went down the tubes.

The SIPP would be invested in the freehold site and buildings, not the company that happened to be leasing them.

The company might go bust, there could be big problems finding a new tenant, but ultimately bricks and mortar endure.
No one is minimising the eggs in basket and liquidity risks, but it is not analogous with only investing in a single company's shares.

AnotherJoe

Clifford_Pope wrote: »

The SIPP would be invested in the freehold site and buildings, not the company that happened to be leasing them.

The company might go bust, there could be big problems finding a new tenant, but ultimately bricks and mortar endure.

Not necessarily.

I understood it was OPs intention to invest in shares in the company that owned (not leased) the bricks and mortar? Because otherwise how to buy portions of it? So, that company could go bust owing more than the B&M is worth, so whilst the B&M endure it would be flogged off to pay debts and OP could still lose everything.