The original inspiration for the SIPP

It’s not what you know or who you know – it is what they know. Greg Kingston looks at how professional connections may be the way to take advantage of the SIPP commercial property opportunity.

Property and SIPPs has always been a much-discussed subject, gaining significant momentum and interest before A-day on 6 April 2006 when the groundwork was prepared to allow investment in residential property. Up to this point the number of commercial property transactions in SIPPs was relatively small but certainly growing.

It appears the then chancellor Gordon Brown got a severe dose of cold feet and delivered what at the time seemed to be a double blow to the SIPP property market. In his 2005 pre-budget report he confirmed that residential property would not be permitted in SIPPs or SSASs after A-day, citing concerns over potential abuse of investments such as holiday homes, second homes and buy-to-lets. There was also concern that the investments themselves would detract from the primary purpose of a pension – building a solid, stable fund for future retirement.

The second blow was seemingly aimed at the existing SIPP property market: amending the existing borrowing rules to make them less favourable. Those changed rules still stand today in that a SIPP may only borrow up to 50% of its net asset value less any existing borrowing.

Advisers and investors are nothing if not survivors – persistent and creative. Despite this new legislation the SIPP property market has continued to slowly grow, not at the same, sometimes meteoric, pace of the overall SIPP market, but grow nevertheless.

It is worth remembering too that residential property was not completely ruled out at A-day. Collective investments are still technically permitted into a portfolio of residential property through syndicates. Under the rules a SIPP will not be permitted to own more than 10% of a single property. This allows a minimum of 10 different investors to pool their SIPPs and form a syndicate, however, the investors must not be related and are not permitted to personally use the properties.

In addition, the property portfolio must be worth at least £1m or hold a minimum of three properties. These rules are clearly not intended to promote mass investment into residential property and there has been little appetite to expand them since their introduction six years ago.

It’s all commercial

Recent SIPP industry surveys, such as those from Money Management and Pensions Management, show that fewer than 2,000 commercial properties a year are bought by SIPPs, figures that suggest the market is still niche. It would be straightforward, particularly for those advisers that do not transact commercial property or SIPPs, to dismiss it as such.

That would be a mistake when considering the entirety of the UK commercial property market. According to HMRC, in 2010 there were in excess of 53,000 commercial property transactions in the UK for properties worth £40,000 or more, with a total value of nearly £65 billion. 41,000 of those transactions were of a value of £300,000 or less, making them well within the reach of many SIPP investors.

These figures demonstrate a market potential that is far from niche and most certainly ready for the mainstream. What is more, it is within the reach of even a property-inexperienced adviser.

Adviser view and their role

Adviser experience of commercial property is perhaps more widespread than previously thought, with nearly two thirds having handled a SIPP property transaction. Recent adviser insight on combined property and SIPP knowledge proved incredibly candid with only one eighth of advisers describing their knowledge as excellent. Four out of five said that they relied on the knowledge, support and experience of the SIPP provider, to varying degrees.

In some respects that is a reassuring statistic. The combined partnership of investor, adviser and provider is able to deliver what is required with each able to add value and experience to successfully complete the process.

To facilitate a SIPP property transaction the adviser will of course need to recommend a SIPP wrapper. However, in many cases experience suggests that the role of the adviser after that is pivotal more in facilitating than advising. The investor and SIPP are at the centre of the process and the adviser manages the key interdependent relationships, such as between the lender, valuer, solicitor and, of course, SIPP provider. A huge range of specialist experience needs to be corralled, herded and managed.

If further evidence was required advisers have also given remarkable insight into the value of property investors to their own business. One third of advisers deem property business very profitable and worthwhile and a further two fifths state that their SIPP property investors are their longest-standing clients and produce an ongoing income. SIPP property business appears to be good for advisers and, if not already, should be relatively simple to transition to a post-RDR model.

The benefit of the SIPP wrapper

Benefits are, of course, consistent with any investment within a SIPP wrapper and they are worth repeating:

• Any rise in capital value can be realised free of capital gains tax
• Income generated by the property – rent for example – is free of income tax
• Once in the SIPP wrapper, the property, like any other asset, is beyond the reach of personal or business creditors

The last point is especially relevant for owner-occupiers who as SIPP investors effectively become the personal tenant of their own SIPP. They have other benefits too, in that the rent paid by the business is likely to be tax-relievable as a genuine business expense. Of course, all transactions must take place at market value.

It is important not to overlook the other main consequence of an investor’s SIPP buying the property from their business, that the cash that is returned back into the business and now free to be deployed for whatever is required – cashflow support, capital investment and more.

Where’s the opportunity?

Fewer than 4% of commercial property purchases in 2010 were made by so either there is insufficient awareness of the potential benefits or SIPPs and commercial property are simply unattractive. Assuming for the latter that there is continuing adequate evidence to the contrary there must be a significant shortfall in awareness of the potential benefits. Indeed, recent research by Suffolk Life of 238 advisers yielded some fascinating insights, confirming that more awareness is needed if the SIPP commercial property opportunity can be realised.

Fewer than 7% of commercial property transactions in SIPPs are investments recommended by an adviser, a startling figure. Balancing this is the response that more than 70% of commercial property investments are either driven by the investor, another professional such as a solicitor or accountant, or by a combination of the two.

There are several conclusions to these findings. Firstly, advisers are reluctant to specifically recommend direct commercial property investment as a solution and, in the current regulatory environment, that is perhaps not surprising.

Secondly, the figures confirm the primary sources of property business for advisers. Investors themselves, together with other professionals involved in the relationship, are the driving force behind the property transactions, but not enough of them are aware of the benefits of using a SIPP for the purchase.

Lastly, it is clear that SIPP retirement planning is no longer the sole influencing factor in property transactions.

The groundwork has been laid – more than 60% of advisers confirmed that they have referral processes in place with accountancy and law firms and an even higher number also have these professionals as their own clients.

Realising the opportunity

Experience in the market and insight from research has confirmed that the vast majority of SIPP property transactions are driven by the investor and of these the majority are small businesses owners and owner occupiers. This makes the role of the accountant in particular crucial in identifying the opportunity for both investor and adviser.

While in most cases an adviser looks after personal finances, the accountant can fulfil the same role for an investor’s business. They see tax returns, work through the profit and loss, discuss planned capital expenditure and sign off the company accounts. They know the business inside out. They know if the business owns a property or if it is struggling with cashflow or needs to raise capital to invest in plant or machinery.

There are countless triggers to consider a referral to an adviser but in reality, in these difficult economic times, there should be only one that the accountant needs to assess: whether the business owns its own property. That’s the catalyst to meeting a host of needs, one of which is quite simply to deliver an alternative source of funding to that provided by the banks.

The Government’s requirements on banks to lend, known as Project Merlin was, among other aims, designed to deliver increased lending to SMEs. Reports on its success are mixed and there appears to be one constant – if credit can be found it is expensive, much more expensive than many businesses have experienced in the past decade. Using a SIPP to unlock a source of finance is attractive to business owners as their pensions can also benefit from the same transaction.

The value that a well-informed accountant or solicitor can add to an adviser’s business is clearly demonstrable, but it needs investment in time to make them aware of the opportunity and how to realise it.

A very bright future

Looking back at 2005 we will never know if Gordon Brown was right to have been concerned about residential property. Perhaps, given some recent news about some property UCISs, he was right. One thing he did not need to be concerned about was SIPPs being used for purposes other than retirement. Today there is a huge SIPP property opportunity waiting to be seized that can serve both retirement planning and the needs of funding small businesses. Gordon Brown probably will not care if advisers take advantage but the current chancellor, George Osborne, almost certainly will if it means small businesses are able to get the funding that they need.

Greg Kingston is head of marketing at Suffolk Life

By Greg Kingston | Published Apr 18, 2012 | FT Advisor