Updated: November 18, 2019

A Guide to SIPP Property Purchases

Looking at placing property within your SIPP portfolio but not sure how it works? This comprehensive guide will help you make the right choices.

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Tony Stevens

Author: Tony Stevens - Finance Expert

Updated: November 18, 2019

Investing in property with a SIPP (or Self Invested Personal Pension) can be a highly rewarding retirement option under the right circumstances, and we often hear from customers who are looking to add property to their pension portfolio.

In this guide, you’ll find out about the various ways that you can use a SIPP to buy property, and how to get started. We’ll take a look at the kind of property you can invest in, how much you’ll need in your pension pot and more.

We work with a group of pension experts who can answer all of your questions about investing a SIPP in property.

SIPP property purchases: how does a property SIPP work?

A ‘property SIPP’ isn’t a different ‘variety’ of SIPP, it’s just a SIPP that holds property.

It has all the tax efficiencies of a regular SIPP, but it doesn’t allow you to invest directly in residential property. You can, however, use a SIPP to invest in commercial property, which brings certain tax advantages.

For example, by investing in commercial properties you can avoid capital gains tax when you sell, and you won’t have to pay income tax on any rent that you receive.

Holding property in a SIPP alongside other assets is allowed

If you choose to hold property in your SIPP you can still invest in other assets as well. How much of a percentage of your SIPP is in property is entirely up to you.

You can also buy residential property, though there are rules and restrictions on direct investment in it

Many SIPPs allow you to invest in property, both residential (though not directly) and commercial. There are specific SIPP property investment rules – and these rules are stricter for buying residential property in a SIPP.

In a nutshell: you can’t invest directly in residential property without incurring a tax bill of at least 55%. There are other, indirect ways to invest in residential property, such as residential property funds. We’ll cover these in more detail later.

Buying a house using SIPP funds

There are also rules around ‘connected parties’, which means anyone you have a personal or professional connection to. So, if you were buying a house through a SIPP from your spouse, friend or business partner, you’d need to buy it at the market rate – no discounts are allowed. This applies to both commercial and residential property.

You can use mortgage financing but will be restricted on the percentage you can borrow

Your SIPP can buy properties using mortgage financing, and can also buy shares of a property-owning property in a SIPP in conjunction with other SIPPs is not uncommon. However, you can only borrow up to 50% of the property’s value.

Property can be an expensive and illiquid asset for your SIPP

Compared to many of the other things that you could invest some of your pension pot in, SIPP investment in property is expensive.

If you don’t have a large pension pot, you may struggle to remain diversified whilst using your SIPP to buy property. Some property within a SIPP can generate cashflow through rent, but other kinds (such as development property) involve holding a non-generating asset until resale. Property is a time-tested investment, but it’s not for everyone.

What property can I buy with a SIPP?

Quite a range. Eligible SIPP property investments include a range of commercial and residential property, in the UK and abroad.

There are a number of permitted property types you could own, including:

  • Shops
  • Restaurants
  • Office Blocks
  • Garages
  • Factories
  • Warehouses
  • Care Homes
  • Farmland
  • Pubs

If you were so inclined you could buy an airport or even a zoo!

Of course, if you’re still interested in investing in residential property through your SIPP, you’ll have to do this indirectly (i.e. through a property fund). Remember, direct investment will attract a tax charge of at least 55%.

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How to buy property in a SIPP: what do I need to know?

Buying property through a SIPP can be an extremely tax-efficient way to invest in some kinds of bricks and mortar but, like other personal pensions, you won’t be able to withdraw your money until you’re 55.

Generally speaking, it’s easier to buy commercial, SIPP allowable property. SIPP rules for residential property are notoriously strict and effectively prohibit any direct investment in residential property or buy to let.

Can you buy a rental property with a SIPP?

What about rental property? There are ways you can invest in the type of property with a SIPP, but as it’s classed as residential, you will need to invest in a property fund rather than owning the property directly. Read more about using your SIPP for buy to let in our guide.

Can a SIPP buy property at auction?

Yes. You can buy both commercial and residential property at auction, though it’s important to bear in mind that there is a steep tax penalty for buying residential property directly.

SIPP property investment through auction is growing increasingly popular. Many people find buying through auction to be an excellent way to acquire ‘SIPP-able’ property investments.

The standard auction rules apply – you’re legally obliged to buy the property once the hammer falls, you must be able to pay a cash deposit on the day, and you should absolutely ensure that your SIPP can arrange the financing to cover the mortgage if required. The rules around buying from connected parties apply too.

Purchasing property through a SIPP at auction is not uncommon, but it’s worth bearing in mind that the process can be competitive and is often complicated by the rules of the auction house you’re buying through.

SIPP property and VAT: Can a SIPP reclaim VAT?

Yes. For example, you can choose to ‘opt’ a property for VAT, which means that you’re able to charge VAT on rental income. As is always the case when you charge VAT – you’ll incur additional tax liabilities.

SIPP property charges

There are 3 main kinds of fees that a property SIPP is likely to incur.

  • SIPP property purchase costs and set up fees
  • Annual administration fees
  • Selling fees

SIPP property fees can vary based on the type of property, and the SIPP that holds them. Some providers may not charge for some of these things, and some may charge more than others.

On top of this, there are other kinds of pension fees that you could incur – these include the costs of transferring in from an existing pension, annual fees for drawing down funds, and one-off fees for taking your lump sum.

Not to worry, though. Every SIPP provider has a detailed fee schedule that, by law, must show you every fee that you could incur. If you’re still unsure, speak to an advisor to see how much investing in property via a SIPP could cost in charges over time.

Can I use a SIPP for overseas property investment?

Yes – but you’ll want to be very cautious.

The last few years have seen a rise in unregulated oversees property schemes that are pitched to UK SIPP investors. Unregulated schemes are not covered by the Financial Services Compensation Scheme (FSCS), which means that you have no protection whatsoever if things go wrong.

There have been a few instances where these schemes turned out to be nothing better than scams. In addition, taxation becomes increasingly more complex with foreign properties – and many UK SIPP providers simply don’t have the understanding of international tax law.

As an example: just because your commercial property investment is tax-free in the UK, doesn’t mean that it’ll be tax-free abroad.

In short, be very careful if considering SIPP investments in residential property abroad. Speak to one of the expert advisors that we work with if you’re considering using your SIPP to invest overseas – a little advice now could save you a lot of money and hassle down the line.

Can I use a SIPP to buy a holiday home?

It may be possible in the right circumstances, subject to the above caveats. If you’re still keen to pursue property abroad and want to tap into the lucrative travel market, take a look at our guide to using your SIPP to invest in holiday homes.

Can I buy residential property abroad with my SIPP?

Not directly. The restrictions around the direct purchase of residential property apply to foreign property too.

SIPP residential property rules: What does the law say?

Basically, it says ‘no’, unless you plan to invest ‘indirectly’ through some kind of residential property fund such as a real estate investment trust (REIT).

For all intents and purposes, this makes the experience quite similar to investing in any other fund, with very little control over what investment decisions your residential property SIPP makes.

Tax on residential property SIPPs

That said, despite the heavy tax penalty, there’s no law that actually stops you using your self-invested personal pension in residential property. But, according to HMRC, residential property in a SIPP will incur a 55% tax surcharge (at a minimum), plus further tax on any additional gains.

SIPP residential property purchase rules were designed to stop people from taking advantage of their SIPP’s tax benefits when buying property in a SIPP. They basically ensure that any direct residential investment will become a losing proposition for your SIPP.

The rare exceptions to the rule:

In a few instances, you can directly hold residential property without incurring a tax charge of 55% or more. Typically this would be a residential property that is directly connected with the business of a commercial property that you’ve invested in, such as a pub landlord’s flat located above the premises. There are strict rules against people connected to you using this residential property.

Where can I find residential property SIPP providers?

There’s a growing range of residential property funds – many of which are offered by some of the largest SIPP providers. Speak to an expert to ensure you’re getting the best possible deal for you.

These funds tend to follow different investment strategies – for example, investing in different regions of the world, or different types of residential property.

SIPP syndicates for residential property

A group of SIPPs can band together to make a joint SIPP property purchase. This is often referred to as a ‘syndicated’ arrangement. A syndicate is different to a ‘group SIPP’ – in which all of the SIPPs form a single legal entity.

Syndicates are somewhat flexible, in that they can all borrow separately to fund their share of the purchase. They can also buy and sell amongst themselves, increasing or decreasing their share in the property as required.

Each syndicate tends to operate a little differently. If you’re interested in finding out more about investing through one, get in touch and we’ll connect you with a SIPP syndicate expert.

Can I use a SIPP for residential property development?

Yes. Land or buildings that are being developed/converted into residential property are usually not classified as residential property until the habitation certificate is received.

This means that this largely becomes a matter of selling the property on and taking profits before the property is put onto the open market.

Selling a SIPP property

You can sell a property that is held in your SIPP in much the same way that you’d sell any other SIPP-held asset.

For example, if it’s residential property that you hold in a fund, you can sell some or all of your shares.  If it’s a commercial property that you have a direct interest in, you can sell all or some of your stake. The main difference, of course, is that you won’t incur capital gains tax on the sale.

Can I sell a property to a SIPP?

Yes. But if it’s a SIPP that you are in any way connected with, for example if it’s held by a family member, business associate or friend, it must be sold at the market rate.

In fact, many professionals who own their business premises have found that selling their offices to their SIPP (effectively becoming their own tenants, and claiming the rent as an allowable expense) is a tax-efficient way to reduce their tax bills. As always, the fair market rate rules also apply here.

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SIPP borrowing for property purchase: how does it work?

SIPPs can borrow on residential and commercial property, much like any other business. However, SIPPs can only borrow up to 50% of the net asset value.

In terms of lenders, this is more of a niche market – not all of them will finance a SIPP. Speak to one of the advisors that we work with if you’d like to see what lenders may be available to you.

Speak to a property SIPP expert today

If you have questions about using a SIPP to buy a property and want to speak to an expert for the right advice, call Online Money Advisor today on 0808 189 0463 or make an enquiry and we’ll be in touch to discuss your needs and answer any questions you may have.

We’ll then get to work finding the most suitable property SIPP advisor for your circumstances.

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We can help! We know everyone's circumstances are different, that's why we work with brokers who are experts in pensions. Ask us a question and we'll get the best expert to help.

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Tony Stevens

Tony Stevens

Finance Expert

About the author

Tony has worked in a vastly diverse array of areas in the pensions industry for over 20 years. Tony regularly writes for trade press, usually on topical and pensions pieces as well as acting as a judge at prestigious national events.

Tony is also a highly qualified Independent Financial Adviser in his own right. His mantra has always been “Hope for the best, but plan for the worst”, and believes that the biggest impact that an adviser can have on a client’s life journey is to take them on a journey from generally having little or no real idea of what their retirement will look like, to giving them the understanding of what their retirement looks like now, then helping them navigate a path to what they want their retirement to be.

FCA Disclaimer

*Based on our research, the content contained in this article is accurate as of the most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms that are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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