Join our community of smart investors

What are the rules on holding property in your Sipp?

If you do not comply with the strict rules on holding commercial property in a Sipp you may face a high tax charge
What are the rules on holding property in your Sipp?
  • Sipps can hold various types of commercial property
  • There are strict rules on what can be held and how
  • If these are breached the Sipp may incur a high tax charge

You can hold various types of commercial property in a Sipp such as offices, warehouses, industrial units, retail premises, surgeries, agricultural land, hotels and pubs. However, the Sipp should not trade via the property although could let it to a company which does trade. “So, for example, while a Sipp couldn’t operate a hotel it could own a hotel building and let it to a holiday company,” explains Richard Harwood, divisional director – financial planning at Brewin Dolphin.

There are also types of commercial property that you cannot hold in a Sipp without incurring a tax charge. These include holiday lets, residential properties which have no connection with adjacent or nearby business premises also owned by the Sipp, and time-shares.

Some properties which have both commercial and residential uses are allowable. Examples include a shop with a residential flat above it, and a pub with letting rooms or a caretaker's or manager’s flat. But the occupant must not be the holder of a Sipp invested in it. 

“Tax charges should not apply [if] the residential element is occupied by an employee of the tenant as a condition of their employment, and they are not connected with their employer, the pension scheme member or anyone connected with the pension scheme member, in connection with the commercial element,” explains Stephen McPhillips, technical sales director at specialist administrator Dentons Pensions.

This still allows, for example, doctors or solicitors’ Sipps to own their surgeries or offices as long as they pay rent to the Sipp for using them.

If your Sipp leases a property to a connected party you need to get an open market rental valuation to confirm the fair market rent for the property at the time. “Without these valuations, HM Revenue & Customs could challenge the commerciality of the transaction between the parties and levy tax charges,” says McPhillips.

A tax charge could also arise if a property transaction between connected parties such as a Sipp member, a family member or the member’s company does not take place on demonstrably commercial terms.

“For example, if a commercial property is bought by the Sipp from the member’s company, to demonstrate that the Sipp is paying a fair open-market price, a capital valuation should be obtained from a suitably qualified Royal Institution of Chartered Surveyors registered valuer,” explains McPhillips.

You do not need to provide these valuations if there is not a connection between the parties, although some Sipp providers might still insist on getting them.

If you incur a tax charge, this is treated as an unauthorised payment and could be as high as 70 per cent of the value of the unauthorised payment.

Your Sipp provider might carry out due diligence on a proposed property purchase to determine whether it will allow it to be acquired via one of its products. Harwood says that if you plan to make some sort of transaction or change relating to the property your Sipp owns, run it by your provider. “Generally speaking they will stop you doing the wrong thing,” he adds.

Some Sipp providers conduct due diligence for free before the Sipp is established, although others charge.

But McPhillips says: “The property acquisition needs to be prudent, sensible and commercially viable for the Sipp – not one that is largely for some other reason which might benefit another party at the expense of the Sipp. [So] selection of a Sipp provider which has particular knowledge and expertise of handling commercial properties might help to avoid costly breaches.”