SIPPs: Tax breaks & soft prices create opportunity for business owners – May 2021

Anyone wishing to confirm the degree to which the UK’s commercial property market has dramatically polarised over the past 14 months need only consider the comparatively recent performance of the sector’s largest listed companies. 
On the one hand, major retail and leisure property owners have grown used to a steady influx of CVAs and administration notices signifying their tenants’ woes; at the same time, most owners have also suffered more than a year’s worth of rent shortfalls or non-recoverable losses. 
Meanwhile, office landlords are coming to terms with a profound, far-reaching change in pandemic-inspired working habits. One recent survey commissioned by YouGov suggested that only seven percent of the UK’s workforce wants to return to the office; working from home (WFH) has, for better or worse, become another ‘new normal’. 
Accordingly, there is a glut of office space available across the land; supply comfortably exceeds demand and, as a consequence, rent levels have tumbled. 
It’s a similar story on the high street where bricks and mortar retailers, many now boarded up, possibly for good, have suffered from shoppers’ predilection for buying online. 
The commercial property market’s winners, of course, have been those involved in logistics and distribution. Moreover, although demand for large warehouses is more than a third (37%) higher* than pre-Covid, there’s little sign of this property sub-sector’s hegemony crumbling. 
The snapshot below highlights the stark contrast in stock market performance between several of the property market’s biggest players.   
Company Property sub-sector

Percentage change in share price (May 18 - May 21)

Hammerson PLC Retail / shopping centres - 82.7%
Capital & Counties Retail / some residential - 39.6%
Shaftesbury PLC Leisure, retail, residential - 32.4%
LondonMetric PLC Distribution / retail parks + 33.2%
Warehouse REIT Warehousing / storage  + 59.6%
Business owners keen to take advantage of softer commercial prices may consider that some areas of the market offer a rare opportunity. Businesses and their owners currently occupying a leased office, retail, factory or industrial premises, for example, could harvest a range of ongoing tax advantages while simultaneously boosting their pension pot by using a self-administered personal pension (SIPP), one of the most effective platforms for acquiring commercial property.
Individuals may contribute 100% of their annual earnings to a SIPP, up to a maximum of £40,000 (the annual allowance for 2021/22), which qualifies for basic tax relief at 20%. In other words, an £8,000 pension contribution is boosted by a further £2,000, funds claimed by the SIPP provider from the taxman on the individual’s behalf. 
Higher rate taxpayers contributing £8,000 to their SIPP would, in addition to basic rate relief, have this supplemented via self-assessment, by a further £2,000, funds rebated directly from HMRC. In this instance, a £10,000 SIPP costs a higher rate taxpayer £6,000. Moreover, unused allowances from up to three previous tax years may be brought forward**.  
Additional benefits accrue when making company contributions to a SIPP, even though they’re included in the £40,000 annual contribution limit, because corporate contributions are considered an expense to set against businesses profits. Recorded as such on the company’s P&L account, they reduce Corporation Tax liability. 
For the next two years, this effectively affords tax relief at 19%, ie the current rate of Corporation Tax. However, following the March 2021 Budget, in which it was confirmed that Corporation Tax would rise from April 2023, the effective rate of tax relief will rise to 25%, enhancing the case for making company contributions to a SIPP. 
It’s a point with which Christine Hallett, Managing Director of Options UK, the independent SIPP and corporate pensions provider, concurs. 
“With commercial property prices tumbling following the pandemic’s surge, a rare opportunity has arisen for business owners to both acquire their premises, possibly at a discount and receive generous, ongoing tax breaks,” notes Ms Hallett.
Though business owners buying a commercial property through their SIPP receive significant assistance from HMRC, one common misconception is that the premises are bought and owned by the business owner; this is not the case. Instead, the SIPP becomes the premises’ landlord to whom the business must continue to pay rent at the prevailing market rate.  
One further benefit of this arrangement arises if the property is eventually sold. Profits made from the sale of premises owned by say, the business owner or through a limited company are potentially taxable.  However, no such tax charge arises should the SIPP sell the property. 
But what if the value of the business owner’s SIPP is less than the cost of a commercial property? In this instance, the SIPP may borrow (from a bank or building society) up to 50% of its value to help fund the property purchase. 
Finally, business premises owned outside of a pension are included in an individual’s estate when calculating any Inheritance Tax due on death. Conversely, assets held in a pension are deemed to be outside of an individual’s estate for IHT purposes. 
SIPPs: Advantages at a glance
1. Individuals receive an almost immediate 20% boost to their pension contributions courtesy of HMRC.
2. Higher rate taxpayers receive a further boost through self-assessment.
3. Corporate contributions to a SIPP effectively attract 19% Corporation Tax relief.
4. This relief rises to 25% from April 2023.
5. The SIPP can borrow up to 50% of the pension pot’s value to buy a commercial property.
6. Rent paid to a SIPP, net of the cost of any borrowing, goes into the SIPP tax-free.
7. Businesses that already own their premises can sell to a SIPP to release funds.
8. There is no CGT payable when a SIPP-owned commercial property is sold.
9. Commercial property owned within a pension does not form part of an individual’s estate and is not liable for IHT upon death. 
*Figures from Property Funds World
**It should be noted that the annual allowance is tapered for higher earners. In the current tax year, for example, for every £2 of ‘adjusted income’ above £240,000, the annual allowance is reduced by £1. The maximum reduction is £36,000. 
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