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Commercial vehicle

The ability to invest in commercial property has always been an attraction for some Sipp and SSAS investors and despite recent plunges in values it remains an attractive option for some categories of pension saver.

Commercial property, once the darling of retail investors has taken a battering in the last two years as double-digit returns morphed into double-digit losses as the bubble burst at the start of the credit crunch in August 2007. Commercial property values have fallen by more than 40 per cent from their peak, according to Investors Property Databank and some market commentators say values could fall by 15 per cent or more in 2009.

However, there are some tentative signs that activity is returning to the commercial property market.

Standard Life head of Sipp Alistair Hardie says: “We believe that confidence is returning to the commercial property market, although we anticipate further downward pressures in returns for current holders of UK property over the next 12 months.”

Any short-term loss of value has to be seen in the context of the timeline for the investment, and, for new purchases, can make them more attractive by reducing the purchase price.

Standard Life says demand for commercial property in Sipps remains high, reporting recently that it recently purchased the 1,000th property through its Sipps.

The typical commercial property investor for Sipps and SSASs has traditionally been the small business owner who wants to buy their own premises, whether it is a shop, office or factory. Other categories of clients who may want to buy their business premises include professionals such as doctors, dentists and lawyers.

Alliance Trust pensions development manager Steve Latto says: “We have a number of clients who find it suits their needs to put a property in a Sipp and often these are professionals who place their work premises within their pension.”

In addition to the investment in the capital value of the building, the Sipp or SSAS client benefits from rent being paid into their pension tax free and any resale of the property is free of capital gains tax.

Another advantage is the ability for the pension to borrow against its assets to fund the purchase, subject to some limitations.

Hargreaves Lansdown pensions analyst Laith Khalaf says: “The main restrictions are on the amount of borrowing which can be taken on in both Sipps and Ssas. This is now 50 per cent of the value of a pension fund, so a £200,000 Sipp or Ssas can borrow £100,000 and therefore buy a property worth £300,000.”

Another restriction concerns the legal ownership of the property. Khalaf says: “One extra thing to bear in mind is that the Sipp trustees actually own the property on your behalf and will need to sanction any changes to it, so savers cannot go playing grand designs without their say-so.”

The type of property available to investors can also be limited and is subject to approval by the trustees. Investments in schemes such as hotel rooms have been accepted by some Sipp providers in the past and some residential property may be allowed.

One last consideration for potential property purchases is the lack of liquidity in commercial property. This is an issue for commercial property in general but can be particularly acute for smaller commercial properties.

Latto says: “This can be an illiquid investment, so advisers must look at the property being considered, who will occupy it and the likely rental income to be received by the Sipp.”

Sipp and SSAS key facts

  • Borrowing limited to 50% of the fund’s value
  • Rent received is free from income tax
  • Any property disposal is free from capital gains tax
  • Property acquisitions are not exempt from VAT or stamp duty, if applicable
  • Acquisition costs and property management fees have to be paid from the fund
  • In most cases, an additional purchase fee and annual admin fee will also be charged by the Sipp or SSAS administrator’

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