Can you buy residential property investment in a SIPP?

Tax efficient, hassle-free investment that could transform your retirement

An investor recently asked us about making a property investment in a self-invested personal pension (SIPP). He likes the idea of investing in property and the superior returns it could produce as he begins to look ahead to his retirement. Being cash rich and time poor, he feels that the passive returns available when investing in property could be perfect as he builds a retirement nest egg. He’d heard that residential property was allowed, but there might be tax implications for his investment.

In this article, you’ll learn how you can invest in property in a SIPP, make guaranteed returns, and benefit from pension scheme tax advantages.

Residential property in a SIPP – allowed, but not recommended

Most financial advisors and property experts will tell you that you cannot make a direct investment in residential property in a pension arrangement. It isn’t true. You can. However, should you do so you could be taxed on the investment at 55%. Any gains on the investment will also be liable to further tax.

There are some exemptions to these pension tax rules on residential property, but 99% of residential investment is not viable inside a pension. The tax implications destroy the potential returns.

You could invest in residential property in a SIPP by investing in a residential property fund. However, you’ll lose ultimate control and must pay fund management charges. You have no say in how or where the fund is invested.

How to invest in property in a SIPP

If neither in the direct residential property nor a residential property fund, how can you invest in property in a SIPP?

You could invest in commercial property, though there are specific rules to abide by should you decide to do so. The transaction must be done at arm’s length, and the property bought at fair market value. Similarly, rents must be set at market rates. Such rules are designed so that the SIPP owner cannot benefit from the tax advantages of pension investment outside the scheme – for example, where the SIPP owner is also the owner of the commercial property, or the commercial property is owned by a connected party.

Limits on investment in commercial property in a SIPP

Although 100% of a SIPP could be invested in commercial property, most SIPP providers limit the amount investible. It is to protect the SIPP, ensuring it has enough cash and liquidity to cover the expenses of owning and managing commercial property. If the tenant falls behind on their rental payments, they must be chased.

There can be significant cash flow generated by commercial property held in a SIPP. Over time this will effectively reduce the percentage of the fund invested in property, though the investor could decide to reinvest income.

The SIPP could also borrow to invest, and investors can own part of a commercial property without owning it in its entirety.

How can you make guaranteed returns in a SIPP?

When you make a direct commercial property investment in a SIPP, you’ll benefit from the tax advantages of investing in a pension:

  • There is no tax to pay on the income earned in a pension
  • Capital gains accrue tax-free

But commercial property can be risky. If the tenant goes bust, you wave goodbye to rental income. A poor economy could negatively affect rental income and increase void periods. You only need to think back to how high streets were affected by the Global Financial Crisis to understand how returns on commercial property can be affected.

So how can you benefit from the tax advantages of investing in a SIPP, while avoiding the downside risk of commercial property investment?

Tax efficient hotel room investment

An investment in a hotel room is classed as a commercial property investment because it is an investment in property and business. A hotel company with a desire to expand its business will often turn to a hotel manager to run the business and investors to fund the business. The forecasts for UK hotels are positive, with PwC predicting revenue growth and increased room occupancy.

When you invest in a hotel room, you make an investment for a set time. Usually, this is five years. You receive a property deed confirming you as the legal owner. The management company pays all the costs of running the hotel and pays you a monthly income. At the end of the fixed term, the hotel room is repurchased from you at a pre-set price. Not only are you guaranteed a generous income, but also a capital gain.

A hotel room investment could be the ideal Set and Forget investment in a SIPP. For example, how would you like to invest in a hotel room with:

  • Zero ownership fees?
  • 8% net rental return per annum, paid monthly?
  • 110% buy-back valuation at the end of a fixed five-year term investment?

This investment is a hands-off, Set and Forget investment opportunity in an established hotel, which is a popular wedding and events venue near Chesterfield.

Invest such a hotel room investment opportunity, and you could benefit from market-beating income and guaranteed capital growth tax-free – all in a hassle-free investment that could help you achieve the retirement lifestyle you plan for.

If you want to know more about this hotel room property investment opportunity, or others that we can source, contact one of the Gladfish team today on +44 (0)207 923 6100. We guarantee you won’t be sorry.

Live with passion,

Brett Alegre-Wood

About the Author

Brett has over 20 years experience in all facets of property, he owns various companies centred around property and is the driving force behind the education and training at Gladfish. His companies have sold over £850 million in UK and London property and he manages over 1200 properties through his estate agency chain. Today he shares his time between UK, Australia and Singapore. He is married to Arlene and together they have 4 kids.

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