Why SIPPs remain an attraction

May 13 2008 by Joe Haigh, The Journal

DESPITE jangling nerves in the property world, not all sectors are experiencing difficult times.

The North is bucking national commercial property trends as the commercial property Self-invested Personal Pension (SIPP) sector continues to enjoy a steady demand.

Over the last few years, commercial property transactions involving SIPPs have increased due largely to the relaxation of rules following “A Day” (April 6 2006). Previously, only newly acquired property could be placed into a SIPP. “A Day” changed this and now property owned by an individual, or a business with which they are connected, can be “SIPP’ed”.

Initially, this rule change was thought to be a compromise to counter the effects of the more restrictive rule introduced on “A Day” permitting individuals to borrow only 50% of their accumulated fund. Previously, a SIPP member could borrow up to 75% of the value of a property regardless of fund size.

Since “A Day”, Dickinson Dees has been involved in more than 600 transactions for Standard Life alone. More than 70% of these involve property currently owned by the SIPP member or their business with the latest rule changes producing a late surge in tax year dependent transactions requiring completion – or at the very least exchange of unconditional contracts before April 4, 2008.

The main reason that commercial property SIPPs continue to thrive is because the SIPP member is unable to distract themselves from the headline grabbing tax relief on offer – despite this also dropping recently from 22% to 20%. With present levels of basic rate income tax, £400k cash placed into a SIPP to acquire a property will attract relief of £100k in additional pension contributions. This is added to the SIPP funds at source and, with higher rate relief remaining at 40%, would enable the member to reclaim the additional 20% from the Revenue via self assessment.

Despite the initial SIPP set-up costs, stamp duty and consequent legal fees, it still makes economic sense to utilise such tax efficient retirement vehicles while they remain available. Get one quick – before the goalposts are moved!

Joe Haigh is a director in the property finance and investment team at Dickinson Dees LLP.