Tax Efficient Commercial Property Purchase - In Business Summer 2003

01 July 2003

For many businesses considering purchasing commercial property, it may be worth considering whether this property ought to be purchased through a Self Invested Personal Pension (SIPP).

In most respects a SIPP does not differ from an ordinary personal pension plan. It has all the normal tax benefits, such as tax relief on contributions at the members’ highest rate, and all gains are free of tax. All income received, with the exception of tax on the dividends of UK equities, is free of tax, and this includes rental from commercial property. Where it differs, however, is that members have considerable freedom as to where they can invest their money. This includes, of course, commercial property. Residential property is, with very few exceptions, excluded by Inland Revenue rules.

Purchasing a property via a SIPP with the intention of leasing it back to the policyholder’s business is extremely tax efficient. The property is bought using the fund accumulated by the members. Premiums to build up that fund will have already attracted tax relief. The SIPP can also borrow up to 75 percent of the value of the property, this value to include most ancillary expenses related to the purchase. The SIPP then leases the property back to the members at a commercial rent. This rent should then be a deductible trading expense for income or corporation tax purposes. The SIPP may only borrow where it is purchasing commercial property. Borrowing is not permitted for other investment reasons.

The payment of the rent has the effect of boosting the pension fund of the members of the scheme, or where there has been borrowing, should service the loan. On disposal of the property all gains are free of tax.

It is important to point out that the SIPP needs to be established prior to purchasing the property. Therefore if any companies are considering this as a suitable method of property purchase for them, they need to allow time to set up the SIPP before exchanging contracts.

A SIPP is potentially suitable for all owners of small businesses from sole proprietary companies to substantial partnerships. Limited companies have the additional option of considering small self-administered pension schemes, but although pension contributions are often allowed to be larger by the Inland Revenue, there is a considerable loss of flexibility. In all cases it is vitally important that you seek qualified independent advice.

For more information please contact Simon Ludden, Financial Planning Manager.

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