SIPP and SSAS pension borrowing and property purchase

Can I invest my pension in property?

Small Self-Administered Schemes or SSAS and Self-Invested Personal Pensions - or SIPPs - are popular as retirement planning solutions for people with financial and investment experience the knowledge and confidence to manage their investments themselves. 

Instead of trusting your pension investments to a fund manager, they let you invest as you wish. With greater investment freedom, many people have found that they can provide excellent returns – although the risks may be higher than leaving your investment to an expert.

SIPP or SASS?

Anyone can take out a SIPP, but they may involve a minimum fund size because of the high costs compared to standard personal pensions. 

SIPPs are set up by insurance companies or SIPP specialists who remain the trustees but allow savers control over the investments. You have considerable freedom in the investments you choose, but the trustee will set the rules and may restrict what investments will be made. 

However, these investments can include property as well as more familiar investment plans. 

As an employer, you can contribute to your own property SIPP pension through your business. This may have some important tax advantages, as the contributions can be made before profits.

Small Self-Administered Schemes (SSAS or SAAS) are less common. However, if you are a business owner they could offer you an important additional benefit.

A SIPP is owned by a pension provider. An SSAS is owned by the members and, within certain limits, they can invest in what they want.

The means that with an SSAS, you can invest your pension funds into your own business – and enjoy a low-cost source of funding.

However, there are some restrictions. The money loaned must be a real investment, rather than an interest-free loan, and must be paid back by the company with a reasonable rate of interest. However, it could be at a rate substantially below that offered by a commercial lender.

This means that, with an SSAS, you could use your pension fund to buy your own business premises.

The primary reason to hold property within a pension fund, SSAS or SIPP is to maximise the available tax advantages.

One way of doing this is to invest in buying a property in the pension scheme and then rent it back to your business.  A formal lease is created between the two entities and an independent surveyor then determines what rent can be charged. The rent is then paid from the company into the pension scheme and then the pension scheme repays the loan. 

Investing in property with your pension

You can use a self invested personal pension on commercial property, allowing you to invest in the UK's dynamic commercial sector. Using your pension funds to buy a commercial property to rent out should be a way of increasing the pension’s net value.

Technically, both property SIPP pensions and SSAS can invest in commercial property and get the rental income paid back into the pension, but the restrictions on SIPPS are much greater. Investing in your own business premises might be difficult or even impossible with a SIPP. 

You could potentially benefit from the capital appreciation and rental income, but you’ll avoid having to pay capital gains tax should you decide to sell the property. What’s more, under current rules you may not have to pay tax on any income the property may generate, providing you hold it within your self-invested personal pension (SIPP).

In fact, it’s common practice for a business owner to buy the premises they operate from so that the business effectively pays the mortgage and allows the pension fund to benefit from the income generated.

There are a number of permitted property types you could own, including:

• Shops
• Restaurants
• Office Blocks
• Garages
• Factories
• Warehouses
• Care Homes
• Farmland
• Pubs

If you put an investment in your SIPP that HMRC deems to be residential, you will be hit with a penalty tax bill of at least 55% of the value of the investment.

SSAS and SIPP for residential property versus residential development

The high penalty tax associated with investing in residential property makes it a hard avenue to recommend. However, you can still use residential property as an investment vehicle if it is not habitable, because it is still being developed.

The key factor is that your pension must not hold a property that is suitable for use as a dwelling, therefore a property that has not been issued a completion certificate. That can mean there’s an opportunity to use an SSAS to develop a residential property – as long as it’s sold on before the completion of the build.

You may also be able to avoid tax penalties if you can prove that the dwelling is used to house employees as a condition of their employment. You need to talk to a pension and tax expert - and you may also need help with funding. 

Make property investment a reality with Rangewell

If your current pension funds will not cover the cost of the property you want, you can take out a mortgage to cover the extra cost.

For example, you’ve got £500,000 in your pension and the property that fits your plans is £600,000, then you could arrange a mortgage for the remaining £100,000.

It is important to note that pension rules cap the total mortgage at 50% of pension assets.

The purchase of a property in this way can be supplemented by borrowing the balance outside the pension fund and will be subject to the lender’s usual commercial criteria. In this way, the borrowing could be on a joint basis, but with the ownership vested solely in the name of the fund.

Several lenders, including high street banks, will provide this type of funding and interest rates can be very attractive. Using pensions as security for mortgages may sometimes be neccessary but the lender will need to see demonstrable evidence you can repay the loan. 

But remember, buying any business with property involves high costs and it is important to have expert help to get the kind of funding that is right for your plans. At Rangewell, our specialist property team will provide more information about the lending criteria and process involved in a SIPP or SSAS property loan, and will work with you to structure a loan that meets your financial needs.

In most cases, a commercial mortgage will be part of the solution for property acquisition, but this may not be the only financial product that will be required. Other ways of raising funds on a property, such as short-term bridging loans, may have a part to play in a funding package.

There are many lenders who will be prepared to advance finance when it can be secured on commercial property. With an SIPP or SASS-based lending package, the risk to the lender is low but the complications may keep some lenders away from the sector. 

Commercial property funding rates are based on an individual assessment of the value of the property and the potential of the business. Rates will vary substantially between different lenders and we frequently negotiate with lenders to secure the lowest rates and the most favourable terms.

At Rangewell, we work with lenders across the market - and we can call on the expert knowledge you need to make a success of your SIPP or SSAS property purchase. 

ANY PROPERTY USED AS SECURITY, WHICH MAY INCLUDE YOUR HOME, MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE