A Self-Invested Personal Pension or simply “SIPP”, is a kind of personal pension which gives you access to more diverse and a generally wider choice as well as type of investment, when we talk about saving for retirement.
This article’s key focus is on the steps involved when it comes to buying property through SIPP.
What is SIPP?
As we just discussed, a SIPP is a kind of personal pension allowing you to hold or access a generally wide range of assets – which include both residential and commercial property. One of the key advantages of holding assets through SIPP is that it comes with generous and lax tax rules, which apply across the board to any asset you hold within it.
One of the key advantages of buying property through SIPP are the tax benefits which can be applied to contributions. For instance:
- All individuals through this personal pension are eligible to receive pension tax relief at their marginal rate. So, what this means is that if you are a higher rate taxpayer, the UK Government will credit your pension by £20 for every £80 you invest in the property; your tax bill also gets reduced by a further £20. Essentially, the math comes down to just £60 against receiving a £100 benefit.
- All employers or company owners investing in property through SIPP will see their contributions to a pension as an ‘allowable expense’. Therefore, any money contributed to the pension will reduce the corporation tax liability, and, company owners/employers will not have to pay national insurance on the contribution.
How does SIPP work?
Step #1 – Review existing pensions
Take a look at your current pension plans. Contact providers and request a valuation. The existing plans need to be checked for guarantees which can be lost if they’re transferred to a SIPP.
Some Personal Pension Plans, although not that common nowadays, come with GARs or Guaranteed Annuity Rates – you may need to give those up in favour of purchasing property through SIPP.
So, don’t hesitate to consult a Solicitor to understand what kind of benefits you’ll be giving up.
Step #2 – Come up with a plan
It’s really important to carefully consider what you want to achieve: e.g. do you want to find a tenant to occupy the property and give rent to your SIPP or would you rather prefer to occupy the property as a business?
There can be a number of critical questions you might want to ask yourself at this point:
- Can my business afford to pay the rent?
- Will I have surplus funds to take on costs if the property remains vacant for a while or I can’t find a suitable tenant?
- If the property requires any work, how am I going to pay for this?
- Is the amount in my pension sufficient to buy the kind of property I’m interested in?
However, you should also keep in mind that a SIPP also lets you borrow money. In any case, you and your Advisor/Solicitor should plan everything as far ahead as possible.
Step #3 – Identify the right property and fix the purchase price
Keep the following in mind:
- If you’re buying the property for yourself, your spouse or your business through a ‘connected party’, then you need to buy it at the market rate – a rate which cannot be discounted at any point in time.
- If you’re buying the property at auction, then you have to purchase it right away. So, you must check to make sure that your SIPP allows you to afford the property.
Step #4 – Source a lender (if required)
As mentioned earlier, SIPPs allow you to borrow money so that you can easily finance the purchase of a commercial or residential property – through a SIPP, you can borrow as much as 50% of the net asset value, where the property will be treated as ‘security’.
Step #5 – Choose the right SIPP
Even though not all SIPPs allow the purchase of property, most do. With that said, it’s important to understand how each of the SIPP providers may levy their charges.
Most tend to have a set up fee, for example, along with a purchase fee and annual fee. Additional costs may also be applicable depending on the kind of property you buy.
Aside from costs, there are other things to consider as well when we talk about buying property through SIPP:
- Will you require online functionality?
- How financially stable are the SIPP providers?
- Does your chosen SIPP provider have the expertise and experience to smoothly conclude the transaction?
- Are their service levels good?
Step #6 – Transfer the funds
Whether you are moving money from other Personal Pension Plans into a SIPP or making a new pension contribution, now is the time to do it.
Step #7 – Work with a Solicitor
This step in particular is very important because a Solicitor will personally oversee the ‘buying property through SIPP’ process. While some SIPP providers work from a panel of Solicitors, many let you choose your own, so just make sure that your SIPP provider has no reservations working with your Solicitor.
Don’t worry about any legal fees though as the SIPP will pay for the Solicitor’s service charges along with any other legal expenses.
Step # 8 – Conclude the transaction
Now that the legal requirements have been satisfied and funds transferred from the appropriate pensions, you can complete the transaction.
The funds will be first sent to your Solicitor from the SIPP; if your SIPP involves borrowing money, then this will also be sent to your Solicitor. Once received, your Solicitor will forward them to the vendor and the property will then become a part of your SIPP.
Final step – Set up leases
With the SIPP property purchase completed, you will need to set up a lease if your business is the tenant. If the SIPP is based on borrowed money, then the lender will most likely want to add provisions to the lease.
Buying property through SIPP Providers is generally a straightforward process, especially if you work with an experienced and knowledgeable Solicitor.
