Using Your SIPP to Buy Property

One of the major attractions of a SIPP (self invested personal pension) is the ability to invest and develop commercial property, such as industrial units, offices or shops. In certain circumstances, residential properties may also be used for investment.

Funding a Property Investment

You are permitted to borrow up to 50% of your SIPP fund's net value to invest in an approved scheme, so if your SIPP fund is worth £100,000, you could borrow another £50,000 to buy a property for around £150,000. The rent from the property can be used to cover any mortgage repayments, and any rent left over will remain in your SIPP fund to be used for other investments.

However, it's worth noting that the costs involved with buying and managing a property in a self invested personal pension can be considerable. For example, in addition to ongoing annual management charges, most providers will charge fees of between £500 and £750 for property purchases. There may also be heavy charges for selling your investment.

Investing in Commercial Property

The greatest demand for property investment within a SIPP is by businesses who want to buy their own premises. Due to changes to the pension rules in April 2006, such purchases are now permitted, even if the property is already owned by the investor or someone connected to them. The only stipulation is that the transaction must be bona fide (i.e. made on an arm's length basis), or it will result in a 40% tax charge.

Using your business premises as an investment for your SIPP has a number of tax advantages:

• no capital gains tax to pay on the property when it is sold within the pension fund
• as it is a tax-deductible expense, the rent paid into the SIPP is free of tax
• if you die before you start drawing your pension and before age 75, your beneficiaries can receive the proceeds of the sale of the property free of inheritance tax

Investing in Residential Property

Although it is not possible to invest in residential property directly via a SIPP, a commercial property with a residential element (such as a caretaker's flat) may be allowed. Alternatively, those who want to invest in residential property may be able to do so through a collective fund or property syndicate. A syndicate that owns at least 3 different properties worth a minimum total of £1m, and which contains at least 10 investors are permitted to use a SIPP to invest in residential property.