There are many different types of self-invested personal pensions (Sipps) on the market, from those simply offering access to fund supermarket investments to those facilitating the widest possible range of investments, often referred to as bespoke Sipps. Although there is no strict definition as to what category a Sipp falls into, the ability to invest in property is often used as an indicator of it being towards or at the bespoke end of the market.
This is because investing in property via a Sipp is not as straightforward as investing in, say, listed stocks and shares, and certainly does not lend itself to the ‘straight-through processing’ models adopted by simple Sipps. Every property is unique and while the process of purchasing, holding and disposing of property investments in a Sipp is well established, there is a need for experienced and knowledgeable staff to undertake those tasks.
Tangible assets
Although property investment is more complex than other types of investment, there are advantages. From the client’s perspective there is a certain belief – perceived or otherwise – that investing long-term in property is a good thing, mainly borne out of our cultural approach to house purchases. There is also the comfort factor of the investment being something as tangible as bricks and mortar rather than an investment product evidenced only by certificates and terms and conditions. This attitude is signalled by investors shunning pensions and savings products in favour of buy-to-let, despite it not having the tax advantages of pensions.
Due to pension tax legislation, investing in essentially any form of residential property, including buy-to-let, is not viable through a Sipp due to the significant tax charges that would be imposed. There are a few exceptions regarding property of a residential nature; investment in hotels, prisons, care homes and public houses is permissible. Residential property could be included if there is an element of commerce, for example a condition of employment being for an employee to be resident on site, such as a caretaker.
However, there is a great opportunity to combine the tax reliefs of pensions with commercial property investment. Typical commercial properties include offices, factories, warehouses and shops but land which includes forestry, woodland, agricultural land and land for development is also permissible. While many Sipp operators will restrict investment to UK commercial property and land, some specialist Sipp operators will consider overseas property and land too.
Business interests
Although some Sipp members do invest in commercial property or land they have no connection with, and view the property purely for its investment prospects, it is more common to find a connection between the Sipp member and the property, such that they will derive additional business benefits. Typically there will be cases where a Sipp is used by, say, a sole trader to purchase the shop from which they retail, or solicitors in partnership to purchase the offices from which they practice, or directors of a limited company to purchase the factory where they manufacture their goods.
In these cases, although the primary benefit will be the expectation that the Sipp will increase in value through the property’s capital appreciation and the rental payments it will receive, the business could benefit as well. If the business currently owns the property outright, it will have capital tied up which may be better employed elsewhere. The Sipp purchasing the property releases capital into the business and, rather than having sold the property to a third party and paying rent to them, rent goes into the pension.
