Mind Blown - renumerating yourself via SIPP (pension) and then using SIPP to buy commercial property to rent to the business.

[Karimbo]

I just read about someone paying the lions share of their profits into their pension plan. so saving a lot of NI and income tax. They plan to then use the money from their pension to buy a commmercial property that they can rent to their business.

I beleive there is no pension redemption fees either because the pension is just investing into a property (moving from stocks and shares to land).

You can google articles, here's something I found: https://www.myerson.co.uk/news-insights-and-events/investing-commercial-property-sipp

There a trifecta of tax savings
No NI or Income tax, yet you still save to CT
You dont redeem your pension so dont pay the redemption fees
Finally, investment in commercial property using this method does not incurr income tax on the rent like BTL sole trader landlords would be.


What is the catch?

 

[pentel]

Tax when you withdraw anything from your pension. Fees for running the pension.

 

[MikeJ]

We did that. No real catch, but the main benefit is the rent you pay to the pension company isn't counted in the maximum you can put into a pension.

We sold over 6 years ago, but we're still getting around a 12% return on that investment each year. The big risk is the value of the commercial property when you come to sell it. Also, you can invest in any commercial property, you don't have to rent it to yourself.

 

[WaveJumper]

It's a pretty good strategy and many are doing it. I just wonder whats coming though in the autumn statement markets are jittery and personally pretty sure pension, inheritance tax and savings are gonna get hit.

Talking to several people yesterday who are re-visiting their financial planning (at a cost I might add so someone is doing ok out of this) I suggested they might want to wait as they could well be changing it again.

 

[Bobbo]

I guess the "catch" would be that until you're of age to access the pension, it doesn't actually give you any money to live off.

 

[DontAsk]

My brother in law was doing this 30 years ago.

 

[Karimbo]

I guess the "catch" would be that until you're of age to access the pension, it doesn't actually give you any money to live off.

Sure, thats why you are using surplus earnings and deferring it. It is a good way to get money out of a ltd company and secure it into a pension without paying the exit taxes normally associated with other forms of renumeration like dividends and PAYE.

Plus with the requirement to post p&l on company accounts. it might be a good time to extract all surplues profits out of limited companies hide the profitability of your business.

The severity of the issue really depends on how old you are. if you're 22 - you're probably better to reinvest into the business and spend the money acquiring other businesses. If you're 40+ this method has less drawbacks as 55 is just around the corner.

 

[eteb3]

I was under the impression the property has to be rented at arms length, so not to a business the pension-holder has an interest in?

Or maybe it just has to be on arms-length terms.

 

[Scalloway]

A formal, commercial lease agreement must be in place between the pension holder's business and the SIPP and the rent set at a market value by a RICS Registered Valuer.

 

[MikeJ]

Also, unless the rules have changed, you don't need the full value in your pension. You can raise a mortgage against the building to borrow the balance. For some reason 70% sits in my mind, but an IFA can confirm that.

 

[jimbof]

What do the fees from the SIPP provider actually look like in practice for a small - say £200k - £300k - property? I imagine it is a nice income stream for them to manage this for you...

I suppose an obvious downside is that the commercial property sector doesn't grow at the speed of the equities markets, and so to an extent this could be considered putting your money to sleep if you are funding the property purchase with a big chunk of money from a SIPP that could otherwise be invested. Maybe worse than that if the fees further erode any growth. On the other hand it's a tangible asset that could be useful diversification if / when the backside falls out of everything...

 

[Karimbo]

The rental income from property is a form of growth. think of it like you're cashing out some of the value of the property over time which you can put into equities.

 

[N-UPS]

I think commercial RE has been doing better than markets round here (Warrington)
I've seen property sale prices for some units nearby

from the paid prices on land registry

B	2023-07-17	£2,500,000
B	2019-01-30	£1,050,000

this is what blew my mind!!!

 

[N-UPS]

are people really paying £140PSF? Seems so

 

[jimbof]

I think commercial RE has been doing better than markets round here (Warrington)
I've seen property sale prices for some units nearby

from the paid prices on land registry

B	2023-07-17	£2,500,000
B	2019-01-30	£1,050,000

this is what blew my mind!!!

There will always be one, but I don't think this is has been the rule. Data I was looking at showed a very modest increases over the last 10 years for my region.
I was looking at this:
https://www.alanboswell.com/resources/commercial-property-statistics/
Office space £88/sqf 2004 -> £121/sqf 2024 -> £137/sqf 2034?
(Having said that, they all seem high and I'd be mighty upset at those levels, I'm at £33/sqf in Norwich City Centre. But the region goes all the way to Cambridge and Kent so perhaps makes sense).

 

[N-UPS]

Possibly just this area, but its not an isolated case. Another within 1km of the first example, over 100% growth in .... one and a half years.

Transaction history​

B	2022-11-11	£751,920
B	2021-04-16	£350,000

 

[N-UPS]

This boswell report has
"

• In 2024, the average rental cost of commercial property in England and Wales was £94 per square foot."

Seems about a factor of 10 out?

 

[jimbof]

Possibly just this area, but its not an isolated case. Another within 1km of the first example, over 100% growth in .... one and a half years.

Transaction history​

B	2022-11-11	£751,920
B	2021-04-16	£350,000

Well done, you found 2...
I mean seriously, you're not honestly contending that these are somehow the norm?!
If returns in general in commercial property were such, you'd have folk queuing round the block to purchase, outside of pension wrappers.
Not to say these things don't happen though, but behind every one will be a story, and that will rarely be "I bought it and resold it 2 years later for double with no extenuating circumstance"...

 

[N-UPS]

You are right.
Its unusual and hard to explain

 

[jimbof]

You are right.
Its unusual and hard to explain

One real example of such goings on I'm aware of; a large local business here are disposing of a load of properties that are non-core to their business and have done a job lot to a property developer on pretty much a no strings no comeback basis; at least one of the properties is listed with features such as undercrofts extending under roads, history of flooding, sitting tennants, etc which give the owner some significant liabilities. Said company are keeping hold of some of the lots (presumably to develop) and pumping others straight into an auction, and I know from having spoken to some of the people viewing that they didn't seem to have the foggiest about some of the issues, so it's quite possible there will be a big profit on that due to the difference between them buying cheap in a job lot and a mug paying over the odds for a bag of hurt.

I'm sure the company buying the job lot will do well out of the deal once all is said and told, but they're the kind of deals I think that only happen between people who are really in that industry.

"Normal" folk like myself or the OP with a bit tucked away in a pension will end up paying more or less the market rate for anything sold via more normal routes and so will see something much closer to the average growth the market has seen. Any suggestion that a doubling of value of commercial property in any area over any short timeframe is typically or likely achieved is fantasy.