Stephen McPhillips: Property re-development via SIPP

Busy financial adviser Mark is looking to expand his business by buying bigger premises to operate from, however, he will need to re-develop the property to make it suitable for his line of work. It is possible through his SIPP or SSAS?

Mark is a busy and hardworking financial adviser whose business is expanding quite rapidly – so much so that he has outgrown his current office accommodation. His offices have historically been situated in rural locations which, although representing a lovely working environment, have meant that there has been no footfall outside his office. Mark is therefore keen to find a town centre location that will enable him to expand his business further.

Mark knows that the commercial property market is quite buoyant. Indeed, this has helped him to find a buyer very quickly for his rural office, meaning that he can confidently search for his next property. On the other hand, the buoyant market has led to a shortage of good quality office accommodation, as these have tended to be snapped-up quickly by buyers.

To Mark’s pleasant surprise, a small former town centre hotel has come onto the market. Mark knows the property quite well, having been a customer of its food and beverage offerings in the past, and he expresses an interest with the vendor’s agent. Its high street location is ideal for Mark’s business and it happens to be quite close to a couple of accountant connections of Mark’s. The problem, of course, is that Mark needs it to be re-developed into office accommodation for his financial adviser business needs.

As an experienced adviser, Mark has helped clients of his to acquire properties via self-invested personal pensions (SIPPs) and small self administered schemes (SSAS) in the past and he is determined that he will follow suit for his own property if at all possible. After all, he fully understands the benefits of holding properties via SIPPs and SSAS, not the least of which is the fact that there will be no capital gains tax (CGT) liability on eventual sale of the property. This is at the forefront of his mind currently, as he is aware of the CGT bill due on the sale of his current office property.

Mark’s concerns are fourfold –

  • Will it be possible to acquire an empty hotel building through a SIPP or SSAS?
  • Will he obtain planning consent for the re-development into offices?
  • Will it be possible to have the re-development costs funded through a SIPP or SSAS?
  • Can he afford all of this with his accumulated pensions?

He begins the process by first checking with a trusted provider whether or not it would permit the investment. He is delighted to learn that the provider is comfortable with the proposal and that it will guide him on which of the re-development works can, and should, be funded by his pension scheme. The provider reminds Mark that the rules for direct property investment are identical across SIPP and SSAS and Mark decides to go down the SIPP route – one for him and one for his wife – to maximise funding. Mark knows from his experience that his business, as an incoming tenant, will need to pay an open market level of rent into the SIPPs for occupying the property. His business is profitable and cash-generative and Mark is happy that his and his wife’s SIPPs will benefit from the income stream from a strong tenant.

Having cleared the proposal with his preferred provider, Mark proceeds to obtain the necessary planning consents for re-development and change of use of the building. These go through smoothly, possibly due to the fact that the local planning authorities are keen that the prominent building is maintained to a good standard. Mark had engaged an architect to draw-up the necessary plans.

Mark had also taken care at outset to check that the funding for the whole project was in order. It became clear to him that there would be a slight shortfall and his provider reminded him that SIPPs can borrow from connected parties on commercial terms, if desired. As a cash-rich business, Mark’s firm loaned the shortfall monies to the SIPPs and the loan was repaid by the SIPPs over a period of 12 months.

As a result of the whole process, Mark’s business was able to move to high street premises, increase its walk-in business dramatically and continue to thrive. Mark’s and his wife’s SIPPs benefit by owning a high quality office building and receiving a stable income stream from a reliable tenant.

Stephen McPhillips is technical sales director at Dentons Pension Management