Investing in a freehold dental practice through your Self Invested Pension (SIPP)
Principals 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 pension scheme.
There are many advantages of purchasing commercial property through a SIPP such as avoiding Capital Gains Tax on sale, being able to use your pension fund to borrow or “gear up” to assist in the purchase, and reclaiming VAT if the property is VAT registered.
As an example if you have £100,000 cash and you want to buy a freehold dental practice for £250,000 let’s see how long it would take to repay the borrowings comparing buying personally and through a SIPP and assuming an equal net monthly payment of £1,250.
Buying personally the monthly interest payments on the borrowings of £150,000 at 6.25%pa are likely to be £781 which will be fully tax deductible making a net £469. You therefore have an additional £781 pm to put towards repaying the capital, which would pay off the loan in approximately 15 years.
Bought through a SIPP, you can borrow 50% of the value of your pension so provided you can invest £133,333 into your pension, as a higher rate tax payer, you will receive a rebate of £33,333 by HMRC and that contribution then automatically accrues further tax relief taking the total invested to £166,666. Your SIPP can then borrow a further 50% of the value of the fund, £83,334 taking the total pension fund to £250,000.
As a dentist you then rent your premises from the SIPP at a market value of £2,083pm but as a higher rate tax payer your net payments are only £1,250pm (60% of the gross payment). With monthly interest payments of only £434 this leaves the SIPP with £1,649 to repay the capital. Your borrowings would then be paid off within 4 years.
Before you think this all sounds too good to be true there are some drawbacks. Generally speaking a SIPP containing a property is usually twice as expensive to run as one without. Also don’t forget that the investor does not own the property; it is owned by the pension fund / 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.
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