Historically, business owners transferred commercial property into Self Invested Pension Plans (SIPPs) as part of personal tax planning. The attraction was the property sat in a tax-efficient wrapper, while the business continued to occupy the premises.
From 6 April 2027, most unused pension funds and death benefits will be brought into the member’s estate for inheritance tax (IHT) purposes. For those with commercial property in a SIPP, this creates a particular issue. If the property remains in an undrawn pension until death, its value may be exposed to IHT.
Some taxpayers may therefore wish to revisit earlier planning and consider whether the property should be moved out of the SIPP via lifetime gifts, subject to the seven-year potentially exempt transfer regime.
However, an in-specie transfer to the member may trigger an income tax charge. HMRC will generally treat the member as receiving value equal to the market value of the asset. To the extent that value exceeds any available tax-free lump sum entitlement, it is taxed as pension income. There may also be Stamp Duty Land Tax (SDLT), depending on the transfer structuring.
Alternatively, if the property is bought from the SIPP for full value, that may avoid an in-specie pension income charge on the member. The SIPP will generally not pay capital gains tax (CGT) on the disposal. A purchase needs funding, must be at market value, and may still trigger SDLT. It also leaves the sale proceeds within the pension, so does not immediately remove the wider IHT issue.
There is a further trade-off. While the property remains in the SIPP, rental income and gains broadly benefit from the pension tax wrapper. Once extracted, the new owner will generally be taxable on future rental income and may also incur tax on a later sale.
This is therefore not simply about getting property out of a pension. It is about weighing a possible future IHT saving against immediate income tax, SDLT, funding constraints and the loss of the tax wrapper.
The main message is simple: historic SIPP property planning should no longer be left on autopilot. For anyone holding business premises or other commercial property in a SIPP, now is the time to review whether the structure remains fit for purpose.
If you’d like to discuss how these changes might affect your plans, please get in touch.