Self-Invested Personal Pensions (SIPPs), commercial property and tax savings

Owning UK commercial property within a SIPP could be a great way to reach your retirement goals. Here, we outline why and answer the most common questions asked around SIPPs and commercial property investment.

11th January 2023

Firstly, what is a SIPP?

A SIPP is a type of pension fund that provides its members with more control and flexibility re the type of investments you can choose than most other pensions.

What types of property are permitted?

The most common types of property owned are industrial and retail units. However, a SIPP can own commercial land and property of any kind. This includes everything from farmland and agricultural buildings, to hotels, nursing homes and hospitals.

Residential property cannot be held within a SIPP.

How can the purchase be funded?

If the SIPP doesn’t have enough cash to fund a purchase, there are several options:

  • Contributions can be made, either by the SIPP member or an employer (subject to certain limits).
  • A SIPP can borrow up to 50% of its fund value. For example, a SIPP worth £200,000 could borrow an additional £100,000 and use this to help fund a property purchase.
  • Joint property ownership allows part of a property to be owned by the SIPP and the remainder to be owned outside of the SIPP, e.g. 50% each owned by two SIPPs, or 60% owned by the SIPP and 40% owned personally outside of the SIPP.
  • Construction, as opposed to a purchase. If the pension fund can meet the costs of the development, the growth in the value of the completed property could substantially increase the total value of the SIPP and any growth would be free from Capital Gains Tax (as explained below). Planning permission may be required ahead of any development work.

What are the tax advantages?

Contributions can be paid into a SIPP by an individual or their employer. Personal contributions are free from Income Tax (subject to annual allowance rules and earnings) and employers may be able to use contributions to reduce their taxable profits, thus reducing the Corporation Tax payable.

All rental income received by the SIPP is free from Income Tax.

Any increase in the value of a property within a pension fund is free from Capital Gains Tax. The rise in the market value of the property is reflected in the value of the SIPP and if the property is later sold, the profit on sale is tax free.

Upon death, any funds held in a SIPP are usually excluded from the taxable assets which form part of the SIPP holder’s estate and don’t normally incur any Inheritance Tax charge. If a SIPP member dies before the age of 75, death benefits can be paid to the beneficiaries of the SIPP without tax charges. After the age of 75, death benefits are taxed on the beneficiary at their marginal rate.

A SIPP can therefore be a great way to build up a retirement fund and pass down any unused cash, or other assets, including commercial property, to future generations.

What else do I need to know?

There are many rules and regulations applicable to commercial property ownership within a SIPP. A very current topic at the moment is Minimum Energy Efficiency Standards (MEES), so we’ve outlined the key changes and requirements below.

Other rules and regulations cover aspects such as lease requirements, rent reviews, record keeping, property development and ongoing property management.

Old Mill’s Pensions Team has provided administrative and accounting support to a large number of pension schemes since the early 1980s. We have a vast amount of experience and can offer a highly efficient and personal SIPP management service, taking the complexity out of commercial property ownership within a SIPP by providing property services and meeting reporting requirements on your behalf.


Minimum Energy Efficiency Standards (MEES)

MEES for commercial properties were introduced in 2015. The rules are becoming increasingly strict in order to improve the energy efficiency of rented property and reduce carbon emissions across England and Wales.

Currently, the minimum Energy Performance Certificate (EPC) rating of a commercially let property should be an E. From 1 April 2018, this applied to any new or renewed tenancy agreements. As of 1 April 2023, this will apply to all tenancies. Any commercial property with an EPC rating of F or G will no longer be permitted to be let out unless an exemption applies.

Exemptions include:

  • The ‘Golden Rule’, which essentially means that if the energy efficiency improvements required to bring the EPC rating up to an E will not pay for themselves through the energy savings generated within seven years, the improvements are not required to be made.
  • Devaluation, which applies when an independent surveyor confirms that the energy efficiency improvements required will likely reduce the open market value of the property by 5% or more.
  • Third Party Consent, where a related party does not comply, e.g. planning permission is refused for the improvements, or the tenant will not allow access for the works to be undertaken.

Further changes are expected between now and 2030, with a proposed minimum EPC rating of B by 2030.

Is a SIPP the right choice for me?

As with any type of investment, there are risks to consider. For an initial consultation (at our cost) with a pensions manager and financial planner to discuss anything mentioned above, please get in touch with your usual Old Mill contact or click here…


Download the Old Mill SIPP Guide