Buying a freehold dental practice through your Self Invested Pension

Dentists are often advised to buy freehold rather than lease premises but it can be even more effective from a tax point of view if the property is actually purchased by your personal pension scheme.

One of the main advantages of purchasing freehold dental premises through a SIPP is to avoid Capital Gains Tax (CGT) on sale, although with CGT having been reduced to 18% this is now of less importance. You can also use your pension fund to borrow or “gear up” to assist in the purchase, get 100% tax relief on your lease payments to the SIPP and your deposit can also be effectively increased by 40% with the tax relief.

Dentists are often able to buy freehold premises with 100% finance, but for those whose situation dictates they need to find a deposit and don’t otherwise have access to this capital, a pension fund can be a great way to solve this deposit problem.

It’s also worth pointing out the disadvantages. Commercial property can be relatively illiquid compared to cash or stocks and shares, potentially causing difficulty in the event you need to draw an income and tax free cash from the pension. Investing your pension in a property 5 or 10 years before retirement could present unnecessary risks and it’s therefore better considered as a longer term investment.

Typically most pension funds are, for good reason, fairly well diversified, with a combination of various stocks and shares, bonds and cash. However, unless there were significant other assets, investing in one building with your entire pension, could be considered a fairly high risk strategy.

Also don’t forget that the dentist would not actually own the property; it is owned by the pension fund and pension trustees and that any rental income or capital receipts from the sale of the property cannot be taken out of the pension fund in the form of income, until you retire (from 6 April 2010 the minimum retirement age will rise to 55.)

Finally don’t forget that purchasing a freehold through a SIPP can cause delays, frustrations and additional costs as there is an additional layer involved with external SIPP trustees. Generally speaking a SIPP containing a property is twice as expensive to run as one without.