SIPPs and Buy to Let Properties

The beauty of having a SIPP is that you’re able to hold a wide range of asset classes in the tax-free wrapper – and as such, a lot of pension savers want to know if they can include buy-to-let investments in their portfolio.

This can be possible, but it’s much more complex than if you were making standard investments, and there are additional rules, regulations and tax implications you’ll need to factor in. To help guide you, this article will tell you everything you need to know about SIPP buy-to-let investment so you can make an informed decision.

Can you invest in buy-to-let through a SIPP?

Technically yes, but if you’re putting a standard buy-to-let or residential property in a SIPP, your investment would be considered an unauthorised payment and so this would be deemed an  unviable option for most people.

This is because there can be an unauthorised payment charge of 40% applied to the value of the unauthorised payment, with an additional 15% applicable if the unauthorised payment surcharge is applied (55% in total).

There is also a scheme sanction charge of up to 40% that can be levied against the scheme administrator. However, there are other ways to invest in buy-to-let property through a SIPP, but you’ll likely need to do it indirectly and strict exemption criteria must be adhered to in order to avoid the investment being classed as an unauthorised payment.

What are the alternatives?

Due to some of the restrictions on direct buy-to-let investment within a SIPP making it unfeasible, here are a number of options still available to you for this type of asset:

Rules and regulations

There are a lot of specific rules to be aware of if you want to purchase property – particularly buy-to-let – through a SIPP. HMRC are particularly strict with this sector, so here are a few main points you should be aware of:

• As highlighted, direct investment in residential property (including buy-to-let) through a SIPP is possible but will be considered an unauthorised payment and result in a tax charge on yourself (this could be as high as 55% of the original purchase price) and the scheme administrator.
• You’re free to invest in an open-ended residential property fund, but these themselves have strict rules, including the requirement for no more than 15% of the fund to be invested in one property, and additional restrictions regarding mortgages and leases.
• REITs have plenty of rules as well, including the stipulation that at least 75% of the trust’s profit must come from property rental.
• Commercial properties are acceptable for direct SIPP investment.
• SIPP providers will often carry out due diligence before you buy or invest in any property to ensure it’s suitable. If you’re unsure, speak with them ahead of time.
• You may be able to invest in residential property development, provided the property is sold before it becomes habitable and is placed on the open market.
• Things can get tricky if any commercial property held in a SIPP is leased to a “connected party”, such as a family member, and an open market valuation will be required to determine fair rent.

SIPP property purchase rules can be a minefield to the uninitiated, and there’s a lot more to think about besides the above. This is why it’s always best to seek expert advice from a specialist SIPP advisor.

How an advisor can help you invest in buy-to-let property through a SIPP

An advisor who specialises in SIPP property purchases will be able to confidently help you invest in buy-to-let through your pension fund, as they’ll know exactly how you can go about it without incurring a tax charge.

They’ll know the property funds that would be best-suited to your needs, and if you’d prefer to invest directly, they can advise how to make commercial property investment work for you.

They’ll get a detailed overview of your current pension status and retirement goals to make sure these kinds of purchases match your long-term plans, with all advisors we work with offering a free pensions review to get the ball rolling.

Make an enquiry to find out more about how they could help.

Investing in student properties

Given that student properties are typically categorised as houses of multiple occupancy or a traditional buy-to-let, they fall under the “residential” umbrella and therefore wouldn’t be suitable for SIPP investment (unless you’re happy with the tax charge).

Though again, there may be ways to get around this. You could, for example, opt to invest in a REIT that offers specific exposure to this type of asset class, or you may like to consider investing in halls of residence, which are classed as commercial properties and therefore allow for direct investment through a SIPP.

There are again specific rules to be aware of, so make sure to check the HMRC regulations to ensure your investment is suitable.

Would a buy-to-let portfolio be a better alternative?

If you’d prefer to invest in buy-to-let on your own terms, then building your own portfolio of rental property could be a viable alternative to a SIPP. This way you could still generate an income in retirement, either through rental income or future sale of the property, without needing to opt for indirect investment.

However, there are various tax implications to be aware of when going down this route, and you won’t benefit from the tax-free status of a SIPP. Some savers may therefore prefer to opt for both solutions to build a sustainable retirement fund, though it’s important to talk through your options with a specialist advisor so you know which one would be best for you.