Commercial Property in a pension – pros and cons
If you’re thinking of adding commercial property to your portfolio to augment your pension you need to be aware that there are both good points and bad points. We take a look at some of the pros and cons so that you can make an informed decision.
Self Invested Personal Pensions (SIPPs)
Since the early 1990s it has been possible for individuals to choose where they invest their money for their pension, avoiding the traditional route of ‘packaged’ pensions and taking advantage of greater choice and flexibility. These Self Invested Personal Pensions (SIPPs) are now a popular choice for people planning for a comfortable retirement.
Among the benefits of SIPPs is the ability to hold commercial property in a portfolio to enhance any company pensions you may have. This potentially helps you benefit from attractive rental yields as well as strong capital returns.
Rental yields stabilised this year, and with the possibility that positive growth in capital values may be seen towards the end of 2017 capital growth remains one of the attractions for investing in commercial property.
There are also tax advantages to holding commercial property in a SIPP. You will pay no income tax on rental income, for example, and if you sell the property you will pay no Capital Gains Tax. Commercial properties held in a SIPP also fall outside your estate for the purpose of Inheritance Tax. In addition, if you pay VAT on the purchase of a commercial property, you can reclaim the money you have paid via a SIPP which is registered.
Other benefits include your commercial property being protected against creditors in the event of business or personal bankruptcy, the lack of corporate or individual liability on SIPP loans, and the ability of a property to be transferred to a beneficiary in the event of a SIPP holder’s death.
Downsides to holding your commercial property in a pension include some strict rules which you must abide by. For example, commercial property held in a SIPP cannot be used as security for any loans to property companies which you may own, thereby limiting your financial and investment options. SIPP loans also tend to be short term, which can make them prohibitively expensive. In addition, the interest on such loans does not qualify for tax relief.
If you own the building and run a business from it, you are legally obliged to pay the full market rent and if you fall into arrears, the operator of the SIPP can and will pursue you until the arrears are paid in full.
If you rent out your commercial property to tenants other than your own company, there is the possibility that they may default on the rent, or that you may have prolonged periods where the property is not tenanted at all. In these circumstances, you may have to make additional payments to your SIPP from another source of income, or risk having to sell the property, potentially under circumstances which are not fortuitous.
You must also consider the costs incurred in holding a commercial property, whether it is tenanted or not. These include business rates, service charges and any management fees which may be due.
Finally, reliance on a single commercial property in a SIPP may not offer proper diversification which leaves it open to poor performance and a reduction or lack of income for the owner.
If you’re considering holding commercial property as part of your pension you advised to seek professional independent advice before making a decision. If you would like advice and information on any aspect of investing in commercial property talk to a member of our team.