The ability to buy and hold directly owned commercial property within self invested personal pensions (SIPPs) has been a popular investment feature for many years. Many UK high streets will be full of mixed-use properties, with a number of residential flats above retail units.

The following case study brings to life this subject area, demonstrating how a client can achieve their objectives, whilst ensuring that they do not incur unwanted tax charges.

Mixed use commercial property case study

Mrs Lane runs a successful art supplies business through her limited company from a busy rented shop in the high street. Her landlord has indicated that he is considering selling the property, which he will market for £200,000 + VAT. Mrs Lane is interested in purchasing the freehold interest in the property, which includes a flat above the shop, which is subject to a 125-year lease with 98 years remaining, but she has no available capital.

She has a personal pension worth £235,000 and her financial adviser explains that there may be a way to purchase the shop through a SIPP but the flat upstairs would cause ‘taxable property’ complications, which needs careful consideration.

To ensure the SIPP does not purchase an interest in the flat (which is residential property and therefore ‘taxable property’), title to the shop needs to be split out from the freehold title. If her landlord insists that he will only sell the freehold title, it will mean that someone other than the SIPP (e.g. Mrs Lane in her personal capacity) will need to acquire that interest and simultaneously create a long leasehold interest in relation to the shop for the SIPP.

Mrs Lane’s landlord confirms he wishes to sell his freehold interest and is not willing to split title.

The financial adviser reviews Mrs Lane’s current personal pension and finds no penalties to transfer. Mrs Lane sets up a SIPP to receive the transfer payment in readiness for the purchase of the shop.

Mrs Lane enters into negotiations to acquire the freehold of the entire premises personally with the intention of simultaneously granting a long leasehold interest of the shop to her self invested personal pension.

The SIPP provider allows her to select her own solicitors to act for both her and the SIPP and they appoint and instruct the solicitors to start work on the proposed transactions.

The SIPP then registers for VAT and opts to tax the shop (i.e. VAT will be payable on the rent for the shop). Mrs Lane’s business is the current tenant of the shop and there are two years remaining on the existing lease. As the purchase of the property will be with the benefit of an existing lease, it should qualify as a Transfer of a Going Concern for VAT purposes and it should not be necessary to charge VAT on the purchase price. This will make it possible for her SIPP to fund the purchase without having to borrow or pay contributions to it. Her company will continue to pay rent plus VAT to the SIPP.

To ensure the SIPP pays the market value for the long leasehold interest in the shop, Mrs Lane and the SIPP appoint a Member or Fellow of the Royal Institute of Chartered Surveyors who is a Registered Valuer to carry out a valuation. The Valuer confirms that the market value of the proposed long leasehold interest in the shop is £195,000.

As Mrs Lane is the purchaser of the freehold interest for £5,000 and the member of the SIPP, which is buying the long leasehold interest, the two transactions are likely to be ‘linked transactions’ for Stamp Duty Land Tax (SDLT) purposes. This means that the combined total of £200,000 will be assessable to SDLT.

Mrs Lane acquires the freehold of the property and simultaneously sells the long commercial lease to her SIPP with the benefit of the continuing occupational lease to her art supplies company. The interest in the freehold reversion remains with Mrs Lane personally, thus avoiding any potential tax implications with the upstairs flat for the SIPP.

In the interest of keeping the running costs down within the SIPP, Mrs Lane, also a trustee of her SIPP, arranged the insurance for the building and will manage the property herself, including completing the SIPP’s VAT returns.

Purchasing her own business premises through a SIPP provides her with a tax efficient arrangement with the following benefits:

  • the payment of rent by her company is an allowable business deduction and is now being paid for her own benefit rather than to a third party landlord;
  • her SIPP receives the rent and pays no income tax on it; and
  • any future growth in the capital value of the long leasehold interest in the shop will be exempt from capital gains tax, further adding to Mrs Lane’s retirement fund.

Once a cash surplus has built up in her SIPP from rental payments and any contributions, her financial adviser creates a fund platform for the investment of these funds.

The property and other assets are in the SIPP’s discretionary trust and therefore outside of Mrs Lane’s estate, which means they will not normally be subject to inheritance tax if she were to die. In addition, if her business were to fail, the trust protects the property is protected from the company’s creditors.