‘Splitting title’ rules create more opportunities for commercial property investors - June 2023

Commercial property SIPPs offer many advantages for investors, especially for groups of individual SIPPs where they can use part of their individual pension pot to buy commercial properties which would otherwise be beyond their individual capability. 
There are many opportunities for a Group of SIPPs to jointly own an interest in a commercial property, from offices, factories, retail shops on the high street, to garages or land. What is becoming of increasing interest is offices and retail shops that also have residential flats/or apartments above the commercial property.
This becomes of interest to property investors who have previously focused on residential opportunities, but what has become of increasing interest is those property investors are also considering commercial property opportunities.
They can achieve both one part the commercial in their Self Invested Personal Pension. and the residential through their property investment company. How do they achieve that? Let’s look at the how.
One way that is not well-known is from ‘splitting title’. These rules and regulations open up investment opportunities for mixed use commercial and residential properties that are common on high streets and in town centres. The term ‘splitting title’ is commonly used to refer to the rules and regulations which apply in England, Wales and Scotland.
Every commercial property purchase has its own unique set of circumstances, of course. However, for the purposes of purchasing commercial property via a SIPP, it can, in some cases, mean that the business premises can be ‘split’ and then considered separately. 
Commercial property SIPP expert Lisa Bardell (Business Partnership Manager at Options) explains how it works.
“It means that commercial premises can, in certain circumstances, be included in a SIPP, even if those premises are in a building owned by the same investors that also has residential space.” 
One interesting opportunity is existing retail outlets or offices, or any other landmark property such as a public house that are at the heart of a community on high streets or in town centres that are in need of regeneration. In this context, commercial SIPPs can be considered as having an ethical investment aspect because of the social value it can bring to revitalise areas in need of regeneration. 
Lisa comments:
“Government and local authorities recognise that many high streets and town centres are in need of regeneration. This means it can, in many cases, be possible to gain permission to renovate these properties and reopen them as office/retail or new pubs and bars, or for other purposes which opens up a number of flexible opportunities.
With many business premises closing down due to current business challenges, that means these buildings can now be an even more attractive option for commercial property SIPP investors. As a lot of these properties were designed with the commercial part being on the ground floor and living accommodation for the owners or managers above, many are well-suited to relatively easy conversion.” 
Every commercial property purchase has its own unique set of circumstances, of course. However, for the purposes of purchasing commercial property via a SIPP, ‘splitting title’ rules can, in some circumstances, mean that the business premises are considered separately.  
What does splitting title mean and how is it implemented? There are specialists that can provide advice on the splitting of title and the benefits it brings to potential investors (both pension and private investors). Splitting title is a legal restructuring of the property, ring-fencing the commercial title from the residential title so that they are not connected.
This allows the commercial part to be held in a pension scheme and the residential to be held privately. It is possible that the development of a commercial property, with rooms above, to initially be purchased in a SIPP with the residential being sold out of the SIPP once the title has been split and before it is habitable (so it’s an ‘off-plan sale’ which creates more capital growth for the SIPP.
“For example”, says Lisa, “in a scenario where a building now has business premises on the ground floor and apartments on floors above, the business premises could – if certain criteria are met – be included in a commercial property SIPP with all of the tax advantages that brings.
The SIPP owner could then receive rental income from the commercial property tax-free and incur no Capital Gains Tax liability when the property is eventually sold. In addition, there is no requirement for the SIPP owner to operate any form of commercial enterprise of their own to receive these benefits – that’s because the advantages to business owners multiply when they acquire their own commercial premises using a SIPP and effectively become a tenant in their own property.” 
The owner’s business pays a regular market rent to the SIPP and this reduces the member company’s taxable income, freeing-up capital for investment. The rent paid by the business accumulates tax-free within the SIPP, and that in turn could be used to invest in other asset classes. 
Lisa adds:
“There are also benefits in terms of the stability this arrangement provides both for the SIPP holder and the business. The business has a stable landlord who has no intention of selling, while the landlord benefits from having a stable tenant who can be relied upon to pay the rent.
When you think of this in the context of any landmark high street or town centre property at risk of falling into disrepair and becoming a blot on the landscape, but then being revitalised by investors who want to breathe new life into an iconic property at the heart of their local community, it’s a win-win all round.”
As a SIPP provider, Options can provide information and guidance about what can and can’t be done within a pension scheme – but we always recommend that advice is sought from an appropriately qualified regulated adviser before embarking on a financial investment.