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Julian Gibbs

Self-invested personal pensions are probably the best way of investing in commercial property, especially with the high yields now available and the low cost of mortgages. Under the Sipp rules, up to 75 per cent can be borrowed against commercial property and the property can be leased back to the Sippholder. But it must be subject to an independent survey and a rental valuation every five years.

This commercial property facility has made Sipps very popular with professional partnerships which can buy their own offices and then lease back the property to their practice. Those with existing pension plans can transfer money from other pension plans into a Sipp, too.

The other advantages are that the individuals get tax relief on rental income paid into a Sipp while the rent received is payable gross into it. When the property is sold, no capital gains tax is payable on the disposal of property held in the Sipp.

For example, a partnership may wish to buy the property it occupies as its business premises. Between them, the partners may have sufficient funds in their existing pensions to cover, say, the £400,000 cost of the property after raising a mortgage of £300,000. The Sipp trustee then grants a long lease to the partnership at an initial rent of £40,000 a year plus VAT, that is, a 10 per cent return on the gross investment. The cost of the mortgage is 8 per cent on £300,000, thus giving a net initial return of about £12,000 a year after expenses.

Assuming the property rises in value by 6 per cent a year and the mortgage is paid off after 20 years, the value of the property, when it is eventually sold, will be about £1.28m while the surplus income after expenses should be about £500,000.

A very good deal for the partners.


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