Commercial Property / Land into SIPP - Difficult/Expensive?
Discussion
Currently reviewing options for “portfolio diversification”. Currently have 5 different pension schemes running, looking to consolidate 3 into a SIPP and look at commercial property investment (the other 2 are in Global Equity / Govt Bonds).
After consolidation (driven by closure of a scheme which had an element of DB circa 3k p.a. @ 60– already taken the financial advice on offer), the combined SIPP would have a value of c.160k. The 2 remaining running pensions have a value greater than this.
I know typical advice would be to calculate what income I want / need in retirement and work backwards; but this decision is being driven by a want to start a second business I believe I can make a success off (well aware this is a high risk route). Over the next 24-36months I’m looking to exit the city
Other relevant info (just in case it comes up): I’m 44 this year, have 2 dependent children 5 & 8 (university education is already funded), low ltv mortgage on London home – I’m aware that IF I go down this route I’m over weight exposure to UK property; but the commercial side is to enable a business (so I’ve derecognised it in my head).
Given there is a lot of tests to pass to do this (bricks and mortar valuations etc); potential leverage, what sort of costs & other difficulties am I looking at (how specialised is this for an IFA)?
After consolidation (driven by closure of a scheme which had an element of DB circa 3k p.a. @ 60– already taken the financial advice on offer), the combined SIPP would have a value of c.160k. The 2 remaining running pensions have a value greater than this.
I know typical advice would be to calculate what income I want / need in retirement and work backwards; but this decision is being driven by a want to start a second business I believe I can make a success off (well aware this is a high risk route). Over the next 24-36months I’m looking to exit the city
Other relevant info (just in case it comes up): I’m 44 this year, have 2 dependent children 5 & 8 (university education is already funded), low ltv mortgage on London home – I’m aware that IF I go down this route I’m over weight exposure to UK property; but the commercial side is to enable a business (so I’ve derecognised it in my head).
Given there is a lot of tests to pass to do this (bricks and mortar valuations etc); potential leverage, what sort of costs & other difficulties am I looking at (how specialised is this for an IFA)?
I would say that a commercial property investment is not generally something an IFA specialises in. Any good SIPP provider would have a dedicated commercial property team who will be very experienced in this though.
You obviously would have the cost of the SIPP itself (watch out for the standard £150 per hour time cost charging, this can rack up the total fees big time. Mine has a flat annual fee of £750 with no time charging) and then the standard costs you would expect in buying and maintaining a property.
You can leverage up to 50% of the value of the SIPP. So a £160k value would allow you to borrow up to £80k on top. Again, your SIPP provider will handle this for you (and charge you a time cost fee to do so unless you have a flat rate fee).
Your business would have to pay a going market rate to your SIPP to rent the property, but that is simply a tax deductible way of getting more money into your pension!
So it is pretty straight forward. Give me a shout if there is anything else.
You obviously would have the cost of the SIPP itself (watch out for the standard £150 per hour time cost charging, this can rack up the total fees big time. Mine has a flat annual fee of £750 with no time charging) and then the standard costs you would expect in buying and maintaining a property.
You can leverage up to 50% of the value of the SIPP. So a £160k value would allow you to borrow up to £80k on top. Again, your SIPP provider will handle this for you (and charge you a time cost fee to do so unless you have a flat rate fee).
Your business would have to pay a going market rate to your SIPP to rent the property, but that is simply a tax deductible way of getting more money into your pension!
So it is pretty straight forward. Give me a shout if there is anything else.
JulianPH said:
You can leverage up to 50% of the value of the SIPP. So a £160k value would allow you to borrow up to £80k on top.
Would this borrowing usually only have recourse to the assets in the SIPP or can they come after your other assets as well as an unsecured creditor? Presumably the latter. NickCQ said:
JulianPH said:
You can leverage up to 50% of the value of the SIPP. So a £160k value would allow you to borrow up to £80k on top.
Would this borrowing usually only have recourse to the assets in the SIPP or can they come after your other assets as well as an unsecured creditor? Presumably the latter. Given the borrowing rules effectively result in a maximum LTV of 1/3rd of the asset value lenders are happy to do this.
NickCQ said:
Would this borrowing usually only have recourse to the assets in the SIPP or can they come after your other assets as well as an unsecured creditor? Presumably the latter.
If you borrow the max 80k (which would only be available for a bricks and mortar purchase), the value would have to drop 66% for additional recourse to become a factor. As a secured creditor, it would rank above the fund in a default / loss scenario.With thanks to JulianPH for beating me to it!
JulianPH said:
It is only the assets of the SIPP actually. The SIPP itself is the legal entity making the borrowing. The lender has no recourse other than to the assets of the SIPP.
Given the borrowing rules effectively result in a maximum LTV of 1/3rd of the asset value lenders are happy to do this.
Cheers, interesting stuff. Given the borrowing rules effectively result in a maximum LTV of 1/3rd of the asset value lenders are happy to do this.
Given the volatility of commercial property it’s tempting to set up a few silo’d non-recourse SIPPs with £50-100k equity each to buy long-term development land w/leverage. Then chuck a high street shop / small industrial unit in each one to produce enough running yield to pay interest and costs
loafer123 said:
The issue is that you aren't going to get much of a commercial property for £240k - just finding one at that price point or below will be tough.
Granted this won't be prime central London, just need to use imagination a bit. Light industrial / warehouse units in the SE can be had from £120 per sq foot. Plenty of shops available around that price. Agricultural land can be 7K per acre upwards. My area of interests is south coast round to East Anglia.
NickCQ said:
JulianPH said:
It is only the assets of the SIPP actually. The SIPP itself is the legal entity making the borrowing. The lender has no recourse other than to the assets of the SIPP.
Given the borrowing rules effectively result in a maximum LTV of 1/3rd of the asset value lenders are happy to do this.
Cheers, interesting stuff. Given the borrowing rules effectively result in a maximum LTV of 1/3rd of the asset value lenders are happy to do this.
Given the volatility of commercial property it’s tempting to set up a few silo’d non-recourse SIPPs with £50-100k equity each to buy long-term development land w/leverage. Then chuck a high street shop / small industrial unit in each one to produce enough running yield to pay interest and costs
To more tightly define this, just as when an individual takes out a loan (mortgage) to purchase a property, the loan is secured (charged) against the property in isolation, not any other wealth you may have, it is (or should be if you use a competent SIPP provider) structured in exactly the same way when your SIPP does the same.
Therefore you would not need to incur the considerable costs involved in opening multiple SIPPs for each property.
Recourse is limited to the asset itself, nothing outside of this unless a further charge has been sought and granted.
I hope that clarifies things.
stongle said:
loafer123 said:
The issue is that you aren't going to get much of a commercial property for £240k - just finding one at that price point or below will be tough.
Granted this won't be prime central London, just need to use imagination a bit. Light industrial / warehouse units in the SE can be had from £120 per sq foot. Plenty of shops available around that price. Agricultural land can be 7K per acre upwards. My area of interests is south coast round to East Anglia.
About 12 years ago I used my SIPP to buy a 1.25 acre paddock for £5k (so a total cost to me of £2.5k as I was paying 50% income tax).
I then went on to purchase more.
After seeing a plot of 1 acre (a 1 minute walk away from my first one) sell in days for 'offers in excess of £50k' I got an appraisal from the same agent. £80k!
I thought the 12% gross (24% net cost) income yield was good back then, but the 1,600% return on the gross investment (3,200% on the net contribution) over 12 years has been a rather good investment in isolation!
I am actually now worried about the value of the others (when combined with my equity/bond/gilt) within my SIPP, given the limitation of the Lifetime Allowance (a tax on successful investing).
Anyway, buying property at a premium today only works if you are 100% certain (and can control this) that it will be trading at a higher premium in the future.
Buying cheap, undervalued or ignored land makes far better sense to me.
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