The rise in Capital Gains Tax this year has put a lot of strain on landlords who invested in a buy-to-let by way of securing a pension for retirement. The now CGT, set at 28% without being indexed will no doubt take a chunk of a landlords retirement fund.
A loophole through the purchase of commercial property via a SIPP (Self Invested Personal Pension) is a legal way of saving thousands on mortgage repayments using legal tax legislation rules. SIPPS gives the investor in the scheme the choice of where to invest their money, providing an alternative to constrained pension funds or incurring the penalties of a buy-to-let. When it comes to property, SIPPS will allow the holder to invest directly in commercial property.
Any company wanting to purchase a freehold commercial property, can use funds from a SIPP to buy the property outright or put down a 50% deposit and finance the remainder with a commercial mortgage, provided the mortgage is not more than 50% of the original value of the SIPP funds. Another possibility is to invest into your own company’s commercial property. The property is then owned by your pension fund. If the property then grows in value, the profit is then free of income or capital gains tax. If it’s your own company’s property, you can charge yourself rent and the income of the rent is offset against company income, as the property belongs to your pension fund. The added bonus on this option results in zero tax on rental income because the property is held in a pension. You also are not eligible for capital gains tax on any profit generated by the sale. However, any income you draw from your pension whilst retired will be taxed.
When the SIPP rules changed in 2006, the “connected party’ rules were scrapped, whereby you were previously unable to use a SIPP to buy your own property or that of anyone connected to you. Nowadays, those with commercial properties can already sell them to their own pension fund. This is attractive where the property has a lot of equity, or perhaps is free of borrowing. A SIPP is more likely to be able to raise finance, thereby giving the owner potentially substantial funds.
To discuss or receive further information contact Mark Sorby at email@example.com