Pension News & guides

Specialist advisors of UK pension transfer to USA

  • What are your
    UK expat pension options?

    Download our FREE UK pension guide.

Schedule a free (no obligation) 30 minute consultation call at a time that suits you.

Book a FREE Consultation

Investing in Property with a Self Invested Personal Pension (SIPP)

How does a property SIPP work?

A Property SIPP isn’t a different type of SIPP, any SIPP can hold property within its portfolio.

It has all the tax efficiencies of a traditional SIPP, but it doesn’t allow you to invest directly in residential property. You can though, use a SIPP to invest in commercial property, which brings some tax advantages.

Such as, by investing in commercial properties you can avoid capital gains tax when you sell, and you won’t have to pay income tax on any rent that you receive.

Holding property in a SIPP with other assets is accepted

If you wish to hold property in your SIPP you can still invest in other assets as well. How much of a percentage of your SIPP is in property is completely up to you.

You can also buy residential property, however, there are some restrictions and rules regarding direct investments into residential property.

Many SIPPs allow you to invest in property, both residential and commercial. There are specific SIPP property investment rules though and these rules are stricter for buying residential property than commercial property in a SIPP.

You can’t invest directly in residential property without incurring a tax bill of at least 55%. There are other, indirect ways to invest in residential property, such as residential property funds though which we will discuss later.

Buying residential property using SIPP funds

There are also regulations to consider encompassing anyone you have a personal or professional connection to established as connected parties. So, if you were buying a house through a SIPP from your spouse, friend or business partner, you’d need to buy it at the market rate with no discounts are allowed. This applies to both commercial and residential property.

You can use a mortgage for the purchase but amount you can borrow will be restricted as a percentage of the property value

Your SIPP can buy properties using mortgage financing, and can also buy shares of a property that owns properties in a SIPP in conjunction with other SIPPs. However, you can only borrow up to 50% of the property’s value.

Property can be an expensive and not easily converted into cash for your SIPP

Compared to many of the other things that you could invest some of your pension pot in, SIPP investment in property is expensive.

If you don’t have a large pension pot, you may struggle to remain diversified whilst using your SIPP to buy property. Some property within a SIPP can generate cashflow through rent, but other kinds such as development property involve holding a non-generating asset until resale.

What property can I buy with a SIPP?

Quite a range. Eligible SIPP property investments include a range of commercial and residential property, in the UK and abroad.

There are a number of permitted property types you could own, such as; Shops, Restaurants, Office Blocks, Garages, Factories, Warehouses, Care Homes, Farmland and Pubs

You can invest in residential property through your SIPP, but you will need to have to do this indirectly through a property fund. As direct investment will attract a tax charge of at least 55%.

How to buy property in a SIPP: what do I need to know?

Buying property through a SIPP can be an extremely tax-efficient way to invest in some kinds of bricks and mortar but, like other personal pensions, you won’t be able to withdraw your money until you’re 55.

It’s easier to buy commercial, SIPP allowable property. SIPP rules for residential property are notoriously strict and effectively prohibit any direct investment in residential property or buy to let.

Can you buy a rental property with a SIPP?

There are ways you can invest in rental property with a SIPP, but if it’s classed as residential, you will need to invest in a property fund rather than owning the property directly.

Can a SIPP buy property at auction?

You can buy both commercial and residential property at auction, though it’s important to bear in mind that there is a steep tax penalty for buying residential property directly.

SIPP property investment through auction is growing increasingly popular. Many people find buying through auction to be an excellent way to acquire property investments.

The standard auction rules apply that you’re legally obliged to buy the property once the hammer falls, you must be able to pay a cash deposit on the day, and you should absolutely ensure that your SIPP can arrange the financing to cover the mortgage if required. The rules around buying from connected parties also apply.

Purchasing property through a SIPP at auction is not uncommon, but it’s worth bearing in mind that the process can be competitive and is often complicated by the rules of the auction house you’re buying through.

SIPP property and VAT: Can a SIPP reclaim VAT?

You can choose to ‘opt’ a property for VAT, which means that you’re able to charge VAT on rental income. As is always the case when you charge VAT though you’ll incur additional tax liabilities.

SIPP property charges

There are three types of fees that a property SIPP is likely to incur; SIPP property purchase costs, set up fees, Annual administration fees and Selling fees.

SIPP property fees can vary dependant on the type of property, and the SIPP that holds them. Some providers may not charge and some will.

There are also other kinds of pension fees that you could incur including the costs of transferring in from an existing pension, annual fees for drawing down funds, and one-off fees for taking your lump sum.

Every SIPP provider has a detailed fee schedule that, by law, must show you every fee that you could incur. If you’re still unsure, speak to an advisor to see how much investing in property via a SIPP could cost in fees.

Can I use a SIPP for overseas property investment?

The last few years have seen a rise in unregulated oversees property schemes that are pitched to UK SIPP investors. Unregulated schemes are not covered by the Financial Services Compensation Scheme (FSCS), which means that you have no protection whatsoever if things don’t work out.

There have been a few instances where these schemes turned out to be nothing more than scams. In addition, taxation becomes increasingly more complex with foreign properties and many UK SIPP providers simply don’t have the understanding of international tax law.

Remember, just because your commercial property investment is tax-free in the UK, doesn’t mean that it’ll be tax-free abroad. Be very cautious if considering SIPP investments in residential property abroad.

Can I buy residential property abroad with my SIPP?

The restrictions around the direct purchase of residential property apply to foreign property too.

SIPP residential property rules: What does the law say?

Unless you plan to invest ‘indirectly’ through some kind of residential property fund such as a real estate investment trust (REIT).

This is similar to investing in any other fund, with very little control over what investment decisions your residential property SIPP makes.

Tax on residential property SIPPs

Despite the heavy tax penalty, there’s no law that actually stops you using your self-invested personal pension to purchase residential property. But HMRC states that, residential property in a SIPP will incur a 55% tax surcharge (at a minimum), plus further tax on any additional gains.

SIPP residential property purchase rules were designed to stop people from taking advantage of their SIPP’s tax benefits when buying property in a SIPP. They basically ensure that any direct residential investment will become a losing proposition for your SIPP.

There are some exceptions to the rule:

In a few instances, you can directly hold residential property without incurring a tax charge of 55% or more. Typically this would be a residential property that is directly connected with the business of a commercial property that you’ve invested in, such as a pub landlord’s flat located above the premises. There are strict rules against people connected to you using this residential property though.

Where can I find residential property SIPP providers?

There’s a growing range of residential property funds and many of which are offered by some of the largest SIPP providers.

These funds tend to follow different investment strategies such as, investing in different regions of the world, or different types of residential property.

SIPP syndicates for residential property

A group of SIPPs can band together to make a joint SIPP property purchase. This is often referred to as a ‘syndicated’ arrangement. A syndicate is different to a ‘group SIPP’ in which all of the SIPPs form a single legal entity.

Syndicates are somewhat flexible, in that they can all borrow separately to fund their share of the purchase. They can also buy and sell amongst themselves, increasing or decreasing their share in the property as required.

Can I use a SIPP for residential property development?

Land or buildings that are being developed/converted into residential property are usually not classified as residential property until the habitation certificate is received.

This means that this largely becomes a matter of selling the property on and taking profits before the property is put onto the open market.

Selling a SIPP property

You can sell a property that is held in your SIPP in much the same way that you’d sell any other SIPP-held asset.

If it’s residential property that you hold in a fund, you can sell some or all of your shares. If it’s a commercial property that you have a direct interest in, you can sell all or some of your stake. The main difference, of course, is that you won’t incur capital gains tax on the sale.

Can I sell a property to a SIPP?

If it’s a SIPP that you are in any way connected with, for example if it’s held by a family member, business associate or friend, it must be sold at the market rate.

Many professionals who own their business premises have found that selling their offices to their SIPP (effectively becoming their own tenants, and claiming the rent as an allowable expense) is a tax-efficient way to reduce their tax bills.

SIPP borrowing for property purchase: how does it work?

SIPPs can borrow on residential and commercial property, much like any other business. However, SIPPs can only borrow up to 50% of the net asset value.

If you live in the USA we can give advice by phone, email or Skype.

Contact us today for more information.

Schedule a free (no obligation) 30 minute consultation call at a time that suits you.

Book a FREE Consultation