Using a SIPP to purchase a property is highly tax efficient.
This week on Money Talk…
Write a cheque from your personal or business bank account to purchase a property and it’s purely a balance sheet transaction. You receive zero tax relief. But write a cheque to your pension and it’s an allowable expense. You and/ or your company will receive tax relief of at least 20%. So on a £200,000 building purchase you save at least £40,000 in cold hard cash. Further if you already have some money in a pension or pensions you can use that too – that’s deposit money you don’t now need to find.
There is also zero tax on any gain in the property’s value while it’s in the SIPP – so zero CGT, and better still while any interest on a mortgage will receive tax relief if you or your company pay it direct; repayment of capital is not relieved. But put the mortgage in your pension and lease your building back from your pension and 100% of the lease payment is allowed for tax so you have effectively received tax relief on your all mortgage repayments. But what if you can’t get enough money into your pension quickly enough? One answer is to move it into your pension later – but that involves more legal fees, stamp duty and the arranging of a new mortgage. So it can become expensive. But there is an alternative.
Simply purchase the property in the name of a special purpose vehicle (SPV) – a trust. Establish the new SPV with as many “owners” as required, so either a company and or its directors, business partners or the proprietor and their respective SIPPS. Day one participation ratios will depend on the source of the money going in – but this can be easily calculated and agreed. Clearly any lender will still have a first legal charge on the property as well as any required personal or corporate guarantees. The process is:
- If appropriate lend cash to your company (which means it can be withdrawn tax free later)
- The company pays pension contributions into the SIPP – on which it receives full corporation tax relief
- That cash forms the deposit which the SIPPs pay into the SPV
- The bank releases its loan
- The purchase completes
- The SPV and the bank then own the property.
- Over time the ownership ratio in the SPV between the parties and their SIPPs can be adjusted as additional pension contribution are made
- The SPV always owns the property so there are no additional fees on change of ownership
- The SPV leases the property to your company/ you and rent is paid back to the SPV
- The SPV repays the bank mortgage from the rent received
- 100% of the rent payment is an allowable expense for the company (only the interest element would be allowable if the company or you personally repay the mortgage)
- The hidden benefit is that as the loan is in the name of the SPV it would not show up on a personal credit search.
In broad terms for each SIPP a provider might charge:
- Set up £350
- Annually £545
- Each transfer in £50
- Fees related to the property purchase and SPV £600
Facts & Figures‘ fee is negotiable
FYI SIPP provider fees are subject to VAT – Facts & Figures’ are not.
Some of the advantages of this arrangement are:
- Corporation tax relief on the deposit – worth £10,000 cash day one on a £50,000 contribution
- No CGT on any capital appreciation in the building
- Tax Relief on 100% of the rent paid to the SIPP – as opposed to c 70% of the payment qualifying for relief if you pay the mortgage direct
- Any further additional payments against the loan routed through the pension would be allowable pension contributions
- No stamp duty or legal fees on transferring the property to the pension later
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