Now January is past, and we may even dare to think of spring, thoughts also turn to buying property for many. Today we consider commercial property.
SIPPS and SSAS are two popular schemes that you can use to buy property but which is best?
Well, let’s consider the differences first…
The Differences
In a Self Invested Personal Pension, also known as SIPP, you’ll find these are most often used by individuals who want to have their own personal pension setup.
A Small Self Administered Scheme, also known as a SSAS, is most often used by a group of people. Companies usually set up this type of scheme for high level personnel and directors. Because it is for employees, it’s considered to be an occupational pension that can have up to eleven people in the group.
Overseers
With a SIPP, the Financial Services Authority is the overseer of the plan, while with a SSAS, it’s the Pension Regulator who will ensure that all regulations are met.
Using a SIPP for Retirement Investment
Today, SIPP’s are becoming increasingly popular as a retirement vehicle, as it allows for flexibility and for investment in the lucrative commercial property market. It’s looked upon by financial planners as a tax efficient way to use pension funds, but it’s important to note that it cannot be used for personal residential property purchases. Note: this type of plan does not consider letting the property out to a third party, to be a commercial property investment, as defined under the rules.
SIPP’s are also allowed to use partial funds, currently available in the scheme, in order to purchase and finance the balance of a commercial property. This amount cannot exceed 50% of the property’s value. For these reasons, many see this as an attractive way to use their retirement funds. Should the property be used for the SIPP’s own business investment, the lending institution will most likely expect certain conditions to be met.
Your SIPP cannot be used as a way to reduce expenses for your own business, but instead must meet current commercial rules and expectations, including an Asbestos Survey and an Energy Performance Certificate. The purchase in question must meet current commercial expectations as it’s considered a commercial transaction.
Other conditions may apply and it’s best to speak with your financial advisor in order to make an informed decision. They can provide further details and a more in-depth assessment of whether or not this is the right financial choice for your circumstance.
Using a SSAS for Retirement Investment
As an occupational pension scheme, a Small Self Administered Scheme is expected to provide benefits to the members in the scheme. These benefits can be realised on the death of the member or upon their retirement. At no time, during the membership in the scheme, can any part of the SSAS provide benefits, whether directly or indirectly, to a member or that member’s family.
Buying Property
The SSAS can be used for the purchase of commercial property, which in turn can be used by the company, since it’s considered to be a separate entity from the membership. The property in question cannot be owned by another, who is part of the scheme. This would be considered a “connected” person under the current laws.
Key benefits?
Read on…
Effectively, when the company buys a property, it provides the company with corporate tax relief, as funds entered into the SSAS are not fully taxable.
Furthermore, should the property be sold or rented, the company does not incur tax liabilities from the sale of the property, or from the income derived from rental of the property, thereby effectively lowering the company’s tax exposure which is attractive to many companies.
Using a Small Self Administered Scheme is not without risk though. A financial advisor can advise you on how to avoid a lack of diversification in the fund, and investigate any risks that could arise should the commercial property need to be sold. The property that is purchased by the SSAS can never be used as financial security in another transaction, and cannot accept capital allowances for an industrial building.
Loans
Trustees of the SSAS can make loans, using the funds in the scheme, to the company and companies that are associated with the original company, as long as it pertains to the company’s business. Terms and rates must be at current values in a normal commercial marketplace. The loan cannot exceed 25% during the first two years of its existence. Furthermore, it cannot include funds from another scheme until after the two year period has been met. After the two year waiting period, the scheme can then loan up to 50% from the pension fund.
Other conditions may apply and your financial advisor is the best person to explain the process in full detail. All loans must be for the company’s business and interest rates on the loan must be 3% over the base rate that banks use on the day of the loan.
Borrowing
Borrowing is allowed to purchase assets, should the fund not have the resources to make the purchase. Borrowing is restricted to:
- Commercial properties.
- No more that 45% of the market value of the property, plus 3x annual contributions from employer, plus 3x member contributions on an annual basis. The SSAS must exclude the value of assets set aside for the death of member or retirement of member.
- The IR SPSS must be notified, if the term of the loan is over 6 months, and when funds borrowed are less than 10% of current market value of the fund, or £50,000.
Shares That Are Unlisted
Trustees of the SSAS may not purchase more than 30% of shares in any unlisted company. Trustees are not allowed to buy shares from other members or people associated with a member. Members are not allowed to buy from a company that is sponsoring the Small Self Administered Scheme. A 30% limit is applied to voting rights and to dividends of the SSAS.
Acceptable Investments
The PSO state that investments deemed to be acceptable are as follows:
- Shares in the company
- Company deposit accounts
- Commodity Futures
- Financial Futures
- Trading Options
- Copyrights
Non-Acceptable Investments
Certain types of activities and assets are considered to be non-acceptable. The trustees are not allowed to loan to:
- Other members or those connected to a member of the SSAS.
- A sponsoring company or a company deemed to be associated, unless the rate meets the current non-commercial rate.
- A sponsoring company or a company deemed to be associated, unless it is for commercial purposes that have been approved.
- Insolvent companies.
- If monies are being use to rescue a company facing insolvency.
There we are then, a snapshot of buying commercial properties with a SIPP or SSAS, of course there is no “best way” between the two because they are both appropriate for different requirements.
If you do decide to explore this type of investment, the right financial advisor who is experienced with the intricacies of SIPP’s and SSAS’s can help guide and structure your plan in such a way that you meet all the necessary requirements to maximise your return on the investment.
Commercial property can be a great investment for certain individuals or companies. If you wish to discuss how owning it can be part of your financial planning, please call me FREE from a landline on 0800 321 3508. Or if you prefer, call me direct on my mobile at 0757 679 1009.
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