Written by Caitlin Southall, Senior Marketing Executive, Curtis Banks
Research shows that the number of people planning to use property to provide a retirement income is on the rise. While buy-to-let (BTL) investments are an increasingly popular choice for people looking to generate a retirement income, it isn’t as attractive as it once was.
There have been many changes that have impacted the returns available from BTL investments such as changes to CGT thresholds, Minimum Energy Efficiency Standards and changes to what can be offset against income from rental properties.
But there are still tax advantageous opportunities, for those clients wishing to invest in property, if they consider a SIPP or SSAS. There are limitations as to the types of property that clients can invest in, the major one being it cannot be a residential property. However, holding commercial property via a pension offers a number of attractive tax advantages that clients can benefit from:
1. No income tax payable on any rental income received by the pension
2. Tax relief on contributions into the pension
3. No capital gains tax payable on the sale of the property from the pension
4. If the tenant is also the client’s business, the rent should be deductible from the trading profits of the business, which may generate a saving in corporation tax
It might surprise you as to the flexibility that SIPPs and SSASs offer in terms of commercial property investment. They offer a long term opportunity to invest in property whilst benefitting from tax advantages and growing the pension in readiness for retirement. However there are some key considerations that clients should be aware of if they do wish to use their SIPP to invest in commercial property.
SIPPs and SSASs offer the opportunity to invest directly in a huge range of commercial property, from offices, industrial and retail, to zoos, hotels and sports stadia. Residential property is not currently permitted in a pension, as this would be classed as taxable property, and therefore subject to very onerous tax charges. As a rule of thumb, anything that can be lived in would be classed as taxable property.
There is no limit on the number of properties that a client can hold in a pension. There are likely to be annual fees payable per property, and clients should heed the pension lifetime allowance limits, however principally there is nothing to stop clients building a portfolio of commercial properties within their pension.
In the same way that clients would undertake due diligence on a house they were buying personally, or a BTL investment, the pension provider will undertake checks on the property to ensure as far as possible that any potential risks are known and mitigation steps are taken to protect the pension from erosion. An example of this is likely to include a legal report on title provided by the appointed solicitor, which will highlight any boundary disputes, provide information about the legal access rights that the property enjoys, and also building applications/warranties in respect of the property.
This due diligence process is essential in terms of understanding the property, and allows the client and their adviser to undertake a further assessment of the property before it is purchased. If risks are highlighted in the due diligence process, they can decide whether the property remains an appropriate investment for their pension. As the pension is intended as a long term investment vehicle, this step should form part of the client’s own due diligence process in any event.
It is important that clients ensure that any property that they wish to acquire, via their pension, is going to provide them with their intended outcomes: rental income and an increased pension value. This is of course not guaranteed; property can increase or decrease in value the same as any other asset class, but there are steps that can be taken to try and secure these positive outcomes including:
· Ensuring that due diligence is undertaken on the proposed tenant who will occupy the property on completion. Of course if this is a connected tenant, this is perhaps less critical. Estate agents may be able to assist in terms of assessing the financial capability of prospective tenants, with a view to providing comfort that the proposed tenant can afford to pay the agreed rent. Selecting a high risk tenant may have negative implications in terms of obtaining steady income into the pension.
· Clients should check to see the property market for similar types of properties in the locale to ensure that the price agreed for the property is underpinned by the market. It’s likely that any pension
provider will need a valuation report to be provided as part of due diligence, so this may be used as a renegotiation tool if the client has agreed an above market value price with the seller.
So should more investors consider commercial property as an alternative before they buy another residential buy to let? With the tax advantages of owning property in a personal capacity reducing, clients should give consideration to investing in commercial property via their pension instead. The tax advantageous environment, coupled with the right property i.e. a sought after property type in a good location may bring about a better opportunity to save responsibility for retirement. With SIPPs and SSASs, the rental income is outside of income tax, the property is outside of capital gains tax, and the pension is outside of the reach of IHT, which may be further food for thought for clients before they make their next investment property purchase.