Although they have been around for well over a decade, in recent years with better understanding and raised awareness self-invested personal pensions (SIPPS) have really come into their own.  More and more business owners and members of partnerships have realised that there are clear and substantial tax advantages to using this method of investment.  

The SIPPS vehicle can be used to purchase the freehold of the business property that they occupy ranging from shops, offices, surgeries, hotels and industrial units to land, forestry and farms. The offer rent is then paid into the pension fund rather than to a landlord, thereby escaping tax as rental income, and they also avoid capital gains tax (CGT) when the property is sold.  Outside of a SIPP gains above £8,200 would be subject to tax.

However investors who are keen to use SIPPS now have a new deadline looming.  From April 2006 the government will alter SIPPS regulations to allow pension funds to buy residential as well as commercial property.  This appears to be a positive expansion, but other alterations being introduced at the same time could prove to be much more restrictive.  From next April trustees will only be able to borrow 50% of the value of the existing pension fund.   

At the moment the SIPPS vehicle can be used to borrow much more and it is against the value of the property not of the pension fund.  Currently they can borrow up to 75% of the value of the property. So for premises worth £400,000, buyers would need a deposit of £100,000 in the pension fund, then the trustees could borrow the rest.   However under the new regulations they would only be able to apply for a loan of £50,000 on a £100,000 pension fund giving total funds of £150,000.  This is unlikely to cover the cost of a typical business property.

The good news is that there is still eight months left before the new regulations take effect.  But businesses should not be complacent as it can take six months to buy commercial property via a SIPP.  There are a number of parties involved in the acquisition making it more time consuming to progress; the vendor, solicitors for the vendor and purchaser, the provider as well as the administrator, the lender and the valuer.

In order to use a SIPP purchasers must acquire via a SIPP administrator, who deals with the related paperwork.  It is easy to find a local administrator by visiting www.sipp-provider-group.org.uk.  They will take all of the details of property to verify whether it is suitable for a SIPP and will evaluate the finances to ensure that the necessary funds are in place to proceed.  Once this is done they will instruct lawyers to go ahead with the acquisition and will confirm this in writing to the lender to release the relevant funds. As independent chartered surveyors Bruton Knowles is called upon to value the property assets, set the rent levels and advise on investment potential of different assets.

The loan to acquire a commercial property asset via SIPPS should be from a conventional high street source. Mortgages are usually available from the commercial divisions of banks and building societies. The terms of the loan will vary from case to case, but as a guide, interest will be payable at around 1.25% to 2.5% over the Bank of England base rate.