Similarly if the business currently owns the premises but it is mortgaged, consideration could be given to the Sipp purchasing the property and the business using the sale proceeds to pay off the mortgage, which would in turn transfer to the trustees. The business would then commence paying rent to its own pension scheme. If it is currently renting a property from an unconnected third party, it could be considered preferable to rent a property that is owned by the pension scheme of the business owner.
An upside of removing property from the business’ balance sheet by selling it to the Sipp is that any creditors will not have access to it, although conversely the business will no longer have a secure asset on which to obtain credit if needed.
It must also be recognised that even though a property may be held as an investment within the business owner’s pension, it is technically owned by the scheme trustees and all transactions must be conducted at arm’s length market rates. In other words, the business is merely a tenant of a property owned by the pension scheme.
This means the property cannot be bought or sold to connected parties on favourable terms, nor can below-market rent be paid. Some Sipp operators may insist on the appointment of a particular property manager, but it is possible for members to retain control of the property’s management themselves.
Structures of ownership
It is often preferable for the Sipp to purchase the property outright but this is not always possible depending on the value of the property and the Sipp. The Sipp funds could be boosted in a number of ways, such as transferring in other pension arrangements, making further contributions or utilising carry-forward, although the lower annual allowance has placed some limitations on rapidly boosting Sipp funds. Another option is for the Sipp to borrow up to 50 per cent of the net value of the pension, the rental income being used to make the borrowing repayments. If the Sipp cannot purchase the property outright it is possible to arrange partial ownership, with the proportion the Sipp owns increased each year using the in-specie contribution mechanism.
Frequently in the case of partnerships or limited companies, property is purchased via a number of individual Sipps, with each Sipp owning a proportion of the property. For such joint purchases, a family Sipp or small self-administered scheme (SSAS) could be a better alternative – particularly for succession planning where the property ownership can remain unchanged as an asset of the scheme despite business owners and scheme members changing.
