When clients consider purchasing commercial property through a Self-Invested Personal Pension (SIPP) or Small Self-Administered Scheme (SSAS), VAT is often overlooked in the initial planning stages. However, Value Added Tax can have significant financial implications on your property investment strategy. As a SIPP specialist with years of experience helping clients navigate these complex waters, I want to break down everything you need to know about VAT and SIPP property purchases.
The Basics: VAT and SIPP Property
VAT (Value Added Tax) is critically important when dealing with commercial property in a SIPP – both at the purchase stage and going forward with the investment Currently set at 20%, this tax can substantially impact your funding requirements and overall investment strategy
The first and most crucial question to answer is whether the property you’re considering is “opted to tax” (also called VAT-registered). This determines whether:
- You’ll need to pay an additional 20% on the purchase price
- You’ll need to charge VAT on rental income
- You might be able to reclaim VAT paid
Let’s look at a simple example to illustrate the impact
Property NOT VAT-registered:
- Purchase price: £300,000
- Stamp Duty: £4,500
- Total cost: £304,500
Same property VAT-registered:
- Purchase price: £300,000 + VAT (20%) = £360,000
- Stamp Duty (calculated on gross amount): £7,500
- Total cost: £367,500
That’s a difference of £63,000! This clearly demonstrates why understanding the VAT status of a property before proceeding is essential.
How Do You Know If a Property Is VAT-Registered?
This is where many clients draw a blank when first asked. Here’s how to find out:
- Ask the vendor directly – they should know if they’ve opted the property to tax
- Check if current rent payments include VAT
- Look at property documentation for VAT registration information
- If uncertain, the vendor can check with HMRC
An important distinction to make: just because a business that owns the property is VAT-registered doesn’t automatically mean the property itself is VAT-registered. These are separate considerations.
Funding Implications for Your SIPP
If purchasing a VAT-registered property, your SIPP must have sufficient funds to cover:
- The property purchase price
- The 20% VAT amount
- Stamp Duty (calculated on the gross amount)
- Professional acquisition costs (legal, surveyor, adviser, provider fees)
This is crucial because the VAT amount must be available at completion, even if you plan to reclaim it later. HMRC’s VAT reclaim process typically takes 6-8 weeks after purchase, and in some cases can take longer.
Can Your SIPP Reclaim the VAT?
In most cases, yes – but there are important exceptions.
In most cases, the SIPP can get back the VAT it paid on the property if it decides to tax it. However, for this to happen:
- The SIPP provider must register the SIPP for VAT with HMRC
- The property must be opted to tax
- VAT returns must be submitted quarterly
- The reclaim is usually made on the first VAT return after purchase
However, reclaiming VAT might not be possible if:
- The purchase price plus any immediate development exceeds £250,000 and
- A partially or wholly VAT-exempt business will be a connected tenant
This is one area where specialist VAT advice is essential. The @sipp factsheet emphasizes that they “strongly recommend that advice is sought from a tax specialist because large sums are typically involved.”
The Transfer of Going Concern (TOGC) Exception
There’s an important exception where you might not need to pay VAT upfront on a VAT-registered property – the Transfer of Going Concern (TOGC).
TOGC applies when:
- There’s an existing tenant with a lease in place before purchase
- The lease will continue after purchase completes
- The SIPP will be opted to tax before completion
When TOGC conditions are met, VAT won’t be added to the price of the item, which helps the cash flow a lot. The SIPP will still have to sign up for VAT and choose to tax the property, though, because rental income will now be subject to VAT.
The VAT Registration Process
The VAT registration process for a SIPP purchasing commercial property involves two separate submissions to HMRC:
- Registering the SIPP for VAT
- Opting the specific property to tax
These are handled by different departments at HMRC and the timeline can be frustrating. According to IPM Pensions, while historical waiting times were around three months, during the Covid pandemic this extended to around nine months. Current average processing times are approximately four months, though some applications are processed sooner and others take longer.
This timeline should be factored into your purchase planning. There isn’t much that can be done to speed up the process, though.
Opting to Tax: A Long-Term Decision
If your SIPP decides to opt the property to tax, it’s important to understand this is normally a 20-year commitment. During this period, the property cannot be opted back out, so the decision shouldn’t be taken lightly.
As the @sipp factsheet notes, “@sipp Limited will never provide guidance on whether opting a property is advisable or not – we will always recommend specialist tax advice on this point.”
VAT on Property Development
If you’re planning to develop the property within your SIPP, VAT considerations become even more important. When a SIPP undertakes development work:
- VAT may be payable on contractor works
- If the property is opted to tax, the SIPP can recover this VAT from HMRC
- Only “landlord works” can be paid for by the SIPP (not tenant-specific improvements)
It is possible to choose to tax a property that isn’t registered for VAT so that the SIPP can get back VAT on development costs.
Can a Property Be Deregistered for VAT?
This is a question that comes up frequently, and the answer is usually “no.” However, there are rare exceptions.
IPM Pensions mentions one case where deregistration was possible because:
- More than 20 years had passed since the option to tax first took effect
- The property hadn’t changed hands during this time
This is highly specific to individual circumstances and not generally applicable, so specialist advice is essential.
Part Purchases of VAT-Registered Properties
While HMRC guidelines don’t prevent a SIPP from purchasing only part of a VAT-registered property, SIPP providers have different policies based on their risk tolerance.
For example, IPM states they will not part-purchase a VAT-registered property due to liability concerns. If the third party co-owner failed to pay any VAT due, HMRC could look to the SIPP to recover the outstanding amounts.
Other providers may have different approaches, so check with your SIPP provider about their policy.
Practical Tips for Handling VAT in a SIPP
Here are some practical steps to take when considering a VAT-registered property purchase:
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Confirm VAT status early: Ask about VAT registration before committing to a purchase
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Plan for additional funding: Ensure your SIPP has sufficient funds to cover the purchase price plus VAT
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Consider TOGC possibilities: Discuss with your advisers whether the purchase might qualify as a TOGC
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Factor in registration timelines: Be aware that VAT registration can take several months
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Seek specialist VAT advice: Both @sipp and IPM emphasize the importance of getting expert VAT guidance
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Discuss with your SIPP provider: Providers have different policies and expertise in handling VAT
VAT can significantly impact commercial property purchases within a SIPP, affecting both immediate cash flow requirements and long-term investment strategies. While the ability to reclaim VAT is beneficial, the process requires careful planning and specialist advice.
As @sipp notes in their factsheet: “Value Added Tax, or VAT, can be critically important on a SIPP property – both at purchase and going forward. It is a very complex area of tax legislation.”
The key takeaway? Don’t overlook VAT when planning a commercial property purchase through your SIPP. Consult with your financial adviser, SIPP provider, and a VAT specialist to ensure you’re making informed decisions that maximize the benefits of your pension investment strategy.
Remember, while we’ve covered the main considerations here, each property transaction is unique and may present specific VAT challenges that require professional guidance.
This article is for general information only and should not be considered tax or financial advice. Always consult with qualified professionals before making investment decisions.
Supplies general to both insurance backed and non-insurance backed SIPPs
Any charges made to the customer (either directly or by deduction from the funds held within the SIPP) for investment advice and/or the ongoing management of the investments within the wrapper will be for taxable supplies of investment advice/management. This only applies to investment management services supplied to the individual investor and not to charges for the management of collective investment schemes. Please refer to VATFIN5800 for more information on this.
Supplies of introductory services made by IFAs to an investment advisory or discretionary investment management service, whether or not the respective assets are to be held within an insurance backed or non-insurance backed SIPP wrapper, are taxable supplies.
Charges made by the SIPP provider (establisher, operator or trustee) for the general administration/management of the SIPP will be for taxable supplies unless the SIPP is provided under a contract of insurance and the services fall within the insurance exemption, as outlined above and in the VATINS guidance.
What is a SIPP?
There is a type of personal pension plan called a SIPP for people who want to be in charge of their own investments. The SIPP itself is a tax efficient pension ‘wrapper’ that holds investments until retirement. Most SIPPs allow investment in a range of assets, including collective investment funds and commercial property. As with any pension fund, the investor cannot take money from the fund until the age of 55.
There are two main types of SIPPs: those that are offered by insurance companies under contracts and those that are not. Where the SIPP is provided under an insurance contract (insurance backed SIPP) the VAT treatments outlined in the VAT Insurance guidance (at VATINS1000) will apply.
For insurance backed SIPPs, supplies of introductory and administration services made by IFAs, brokers and other intermediaries will generally be exempt under the insurance exemption in VAT Act 1994 Schedule 9, Group 2, Item 4.
For SIPPs that are not provided under a contract of insurance (non-insurance backed SIPPs) any fees that are charged for arranging the purchase of exempt financial products to be held within a SIPP wrapper will be exempt under VAT Act 1994 Schedule 9, Group 5, item 5. Any charges made for introductions to SIPP providers (as opposed to the products held within the SIPP) will be taxable.
Investing in a SIPP: everything you need to know
FAQ
Do SIPPs pay VAT?
Should a commercial property be chosen and VAT be charged, the SIPP will have to pay the VAT amount on top of the purchase price, unless a Transfer of
What tax do you pay on SIPP?
Just like other pensions, investments in Self-invested Personal Pensions (SIPPs) grow free from income tax and capital gains tax.
What is the disadvantage of a SIPP pension?
Investment risk: The value of your investments can fall, leading to potential losses. Inflation risk: The growth of your SIPP may not keep pace with inflation, reducing the real value of your savings. There is a chance that you will outlive your pension savings if you take them out too quickly or live longer than expected. This is called longevity risk.
Can US citizens have a SIPP?
Yes, but only if you have relevant UK earnings. Even if you’re a US tax resident, UK rules let you contribute to a SIPP if you have UK employment or self-employment income.
Can a SIPP be taken out for VAT?
While borrowing could be taken out for this purpose, the maximum borrowing by the SIPP cannot exceed the HMRC limit of 50% of the SIPP’s value. When you buy something, the SIPP provider will register the plan for VAT with the VAT office. Once the purchase completes, the SIPP provider will be required to complete quarterly VAT returns.
Can a SIPP / SSAS register for VAT?
Hence, a property purchase price of £500,000 would mean that VAT of £100,000 would be payable on top. It is possible for a SIPP / SSAS to be registered for VAT and for the VAT element of the purchase to be reclaimed from HMRC and remitted to the SIPP / SSAS bank account.
Can a SIPP buy a VAT registered property?
It is possible for a SIPP to only purchase part of a property, and there is nothing in the HMRC guidelines preventing this. However, like most matters, each SIPP provider will consider the guidelines and apply these to their offering based on their flexibility and risk tolerance. IPM will not part-purchase a VAT-registered property.
Does SIPP pay VAT on rent?
VAT on Rent: Rent received by the SIPP will be subject to VAT, which the SIPP provider pays quarterly to the VAT office. 1. Vendor Inquiry: The vendor should be able to confirm whether the property is opted for tax, based on their purchase transaction or subsequent VAT registration. 2.
How does a SIPP purchase work?
As part of the purchase process, the SIPP provider will register the SIPP for VAT with the VAT office. Once the purchase completes, the SIPP provider will be required to complete quarterly VAT returns. On the first return after the purchase completes, the SIPP provider will make a reclaim for the VAT paid on the purchase.
What is VAT & SIPP/SSAS property purchases?
Understanding VAT and SIPP/SSAS Property Purchases VAT (Value Added Tax) is a consumption tax levied on most goods and services in the UK. The standard VAT rate is 20%, which means that the purchase price of a property will be subject to an additional 20% VAT.