Since new legislation came in last April, leading IFA Origen has seen a growth in interest in its professional clients using group SIPPs to purchase commercial property. Origen has seen an increase in company directors, solicitors, accountants and other professionals seeking to purchase a property often to lease to their own business or as an investment property leased to a third party.
The new rules allow individuals to have as many pension schemes as they wish and provide them with tax efficient investment schemes. However, the changes to borrowing rules in SIPPs from April 2006 have meant that it is now harder for individuals to gear up sufficiently to purchase commercial property.
Whereas previously SIPPs could borrow up to 75% of the purchase price and therefore would only need to have 25% available as a deposit, the maximum borrowing has reduced to 50% of the existing fund value.
The benefits of buying a property through a group SIPP are:
- the pooling of more than one person’s pension benefits to purchase an asset,
- the ability to gear up through borrowing to purchase property,
- the property grows free of income tax and capital gains tax,
- only dealing with one SIPP administrator,
- the group gets competitive terms
Claire Court, Head of Self Administered Pensions, said:
“We are seeing a growth in interest in group SIPPs, where individuals join together their pension funds to buy a property. Each member’s SIPP then owns a proportion of the property and receives a proportion of the rent based on their contribution to the purchase price.
“One word of warning though, those entering into a Group SIPP to purchase property need to be aware that these investments are relatively illiquid and may take time to sell. This is particularly relevant where one member wishes to sell his share of the property and the others don’t.”
-ENDS-
How does the property purchase work?
In order for the purchase price to be viable there has to be sufficient funds in the group SIPP to cover the purchase price and associated costs such as stamp duty, VAT and legal costs.
For example, if you and two other individuals wish to purchase a property for £240,000 plus VAT, the likely overall cost might be:
| Purchase price | £240,000 |
|---|---|
| VAT | £ 42,000 |
| Stamp duty | £ 8,460 |
| Legal costs | £ 3,000 |
| SIPP costs | £ 4,200 |
| Total | £297,660 |
The VAT of £42,000 would be reclaimed by the SIPPs within 3 months of completion.
The funding figures for the group might be:
| Member 1 | Member 2 | Member 3 | |
|---|---|---|---|
| SIPP fund value | £ 85,000 | £47,000 | £ 68,000 |
| Maximum borrowing (50%) | £ 42,500 | £23,500 | £ 34,000 |
| Total spending ability | £127,500 | £70,500 | £102,000 |
This group has the overall spending ability of £300,000 and therefore the purchase can proceed. The percentage ownership of the property and therefore share of the incoming rent of £16,000 per annum is:
| Member 1 | Member 2 | Member 3 | |
|---|---|---|---|
| Share of property | 42.5% | 23.5% | 34% |
| Share of rent | £6,800 p.a. | £3,760 p.a. | £5,440 p.a. |
Origen
Origen is one of the UK’s leading providers of financial advice and services.
Origen’s principal lines of business are:
- private clients
- advice to small/medium sized companies including specialist planning for the owner-directors,
- communication and education to employees of large corporate clients including executive counselling services,
- provision of advice to affinity groups such as newspaper readers.
Origen has key specialisms in the corporate and high net worth areas. It has its own Self Administered Propositions, a dedicated Research department, Discretionary Fund Management business, Annuity, Mortgage and Healthcare operations.
AEGON UK
- AEGON UK is part of the AEGON Group, one of the world’s largest financial services groups. AEGON UK currently has assets under management of £44 billion. The AEGON group manages assets of £200 billion.
Jonathan Atkins