You may (or may not) be aware of this, but on our Island our pension legislation allows us to hold Buy-to-Let (“BTL”) residential as well as commercial property in a pension.

Well, when I say ‘a pension’ what I really mean is a Self-Invested Personal Pension – or SIPP.

There are a couple of ways in which we can do this – either use the actual cash within the pension to buy the property or we can transfer a property into a SIPP as an ‘in-specie’ pension contribution (this is a bit more complex).

So why would we even want to do this in the first place?

Well as a couple of our more sceptical readers have mentioned, if you don’t really trust the stock market (or the investment world in general), then having something in bricks and mortar which you can actually see and physically touch, and have some control over, might be regarded as a ‘safer’ investment. After all, you only need to look at today’s house prices compared with twenty years ago to see the effects of real growth. Plus, income yields (the rate of return offered by rent) have in general been good in the Island for property owners.

So as an investment in general, it is regarded as (mostly) sound.

But there are a few more advantages than that.

Firstly, any rental income that the SIPP receives from its tenants is tax free.

Why does this matter?

Well, let’s imagine that your SIPP collects £30K in rent during the year but you take £10K per year from your SIPP as income. This means that you personally are only taxed on the £10K you took from the pension, not the £30K rental income, as would be the case if you held it directly.

So it makes tax planning much more effective.

Not only that, but as the property is effectively in a trust (that’s what a SIPP is), then it’s also protected from creditors in the event of bankruptcy.

So anything else?

Well, if your SIPP doesn’t have enough money to purchase the property then it can borrow money (strange as this may sound) to the tune of 50% of the SIPP’s net assets value. This could then be potentially repaid by its rental income.

It’s not all chips, cheese and gravy though, and you need to be aware of some of the drawbacks.

For example, if you need to get access to large amounts of cash in your pension, then property is hardly very liquid and even if you do want to sell, you can be stuck with it. It also lacks diversification from an investment point of view – you’ve heard the old adage about diversifying your portfolio, right?.

Then there’s the rental agreements – these have to be on a commercial, arms-length basis, so you can’t put your own house in a SIPP and not charge yourself rent.

Then there’s the costs and complexity of such an endeavour. Both buying and renting a property will involve legal fees. Not only will your SIPP provider charge more for the luxury of having such an asset, but you’ll also need a Financial Planner to help you, for which there will of course be charge as well.

And don’t forget risk and uncertainty of getting a tenant who will both pay the rent and actually look after the property. And don’t underestimate the time it might take to re-let the property once that perfect tenant leaves.

Passing on your property is fairly straightforward in the Island. Your spouse or partner can benefit from the income as you did, or if they don’t fancy it being held in a SIPP, then it can be liquidated/released after a small tax charge of 7.5% has been settled.

Owning BTL property in a pension is a real bonus for IOM SIPPs, but it’s not without its pitfalls, and as always, get some good advice before jumping in.