Sipps
Another route to own property is through the use of borrowing within a pension scheme. Both small self-administered schemes (SSASs) and self-invested personal pensions (Sipps) allow borrowing when investing in commercial property. Both are popular choices for investors wanting to gain access.
It must be noted that these are strictly for commercial property exposure, which can also provide solid returns for income. The test of what classifies a property as commercial rather than residential, is that if the property can be lived in then it is residential – although oddly, HM Revenue and Customs classify beach huts as residential.
Commercial exceptions
There are some exceptions to the commercial and residential rules. Recently, Claire Trott, director and head of pensions technical at Sipp and SSAS provider Talbot and Muir, was contacted by someone wanting to buy a pet shop, but the property’s contract stated that the manager of the shop would have to live in the flat above it to look after the animals at night.
This can be an exception in allowing someone to live in part of the building because it is part of the job contract – so long as the person who lives upstairs is not a scheme member, relative or anyone connected to the scheme. She adds this is more common when buying pubs and the manager lives in the property.
Investors wishing to use their pension pot to buy property can borrow up to 50 per cent of the value of the pension, and it has no bearing of the value of the property.
Martin Jarvis, associate consultant at Mattioli Woods, explains that there is no difference in borrowing within a Sipp or a SSAS, as they can both borrow the same amount of scheme net assets. “They can also borrow from a connected party as long as further conditions are met – mainly the transaction is carried out on a ‘commercial’ basis and no special terms are granted because of the connection,” he says.
Ms Trott says, “It is only tested at the point of time when you take the loan out. If your other assets drop in value, it does not mean you have gone over your borrowing limit.”
Group Sipps are structured in the same way, so 50 per cent loan against each name. Ms Trott says, “It can be easier if you are buying as a group to buy through a SSAS rather than a Sipp. The costs can be less and paperwork too. If there are three or more people and they are eligible to have a SSAS, then that route is recommended.
“A SSAS loanback is a good thing. If a company wants to borrow money from its pension scheme, then it can work really well at a very low cost rate – less than 2 per cent,” she adds.
The use of borrowing within a pension scheme is “perfectly fine,” Ms Trott adds, saying it is something she sees a lot of although typically, “Pension funds aren’t big enough to buy the whole property.”
Mr Jarvis says if all conditions are met, pension scheme borrowing can provide an extension of the purchasing power of pension funds. “The flexibility of being able to borrow from connected parties means that borrowings can help wider scheme planning dovetail with business planning – for example, securing extra funding for the scheme to purchase commercial property from the business,” he adds.
Options
The mortgage crash of 2008 may be many years behind us, but it is understandable if it is still fresh in many investors’ minds. It should be kept in mind that, since then, more regulation and tighter rules on lending have come into force with the Mortgage Market Review (MMR). But whether it is commercial or residential, buying property is no longer as difficult as it once was. Although, if simplicity is what a client wants, then a property fund or investment trust may be the best – and cheapest – option.