Investing in commercial property brings investors significant tax benefits

Lower prices and lower borrowing rates have led to an increased interest in putting commercial property into a Self-Invested Personal Pension (SIPP). The general fall in the price of commercial property has made it a more affordable investment and has made it possible for SIPPs to acquire property interests that may have previously been unobtainable.

It is possible for the trustees of a SIPP to borrow money from a commercial lender in order to assist with the purchase of suitable property. HM Revenue & Customs (HMRC) guidelines state that the Trustees can borrow up to 50 per cent of the net asset value of the SIPP, as calculated immediately before the borrowing takes place. This limit includes all existing borrowing.

Investing in property can be particularly beneficial when it is used to buy the business premises of the SIPP plan holder. You can invest in commercial property that you already own or plan to buy. The property becomes an asset of your pension fund, bringing you significant tax benefits:

– Any growth in the property value is tax-free – when you come to sell the property, there’s no capital gains tax to be paid on any profit
– Rental income is free of income tax – there’s no income tax payable on any rental income you receive. However, if VAT is included in the rental income this may be payable to HMRC

– In addition to these valuable tax benefits, investing your SIPP funds in commercial property has other advantages as well:

Protection against market volatility – the commercial property market is generally considered less risky than investing in company shares, but you should be aware that investing in a single property could increase the investment risk and property can take longer to sell

Tax relief for your business – if you use the premises for your own business, any rent you pay is an allowable business expense

Estate planning – if you should die, the property doesn’t usually form part of your estate, so potentially there’s no inheritance tax to pay on it

The pension and tax rules are subject to change by the government. If the investments perform poorly, the level of income may not be sustainable. The value of your SIPP when you draw benefits cannot be guaranteed as it will depend on investment performance. The value of fund units can go down as well as up and investment growth is not guaranteed. The tax benefits and governing rules of SIPPs may change in the future. The level of pension benefits payable cannot be guaranteed as they will depend on interest rates when you start taking your benefits. The value of your SIPP may be less than you expected if you stop or reduce contributions, or if you take your pension earlier than you had planned.