How to Set a Market Rent for SIPP Property

When a SIPP owns a commercial property and leases it to a connected party — typically the member's own business — HMRC requires that the rent charged is the open market rent. This is the rent that an independent, arm's-length tenant would pay for the same property on the same terms. The rule exists to prevent pension schemes being used to benefit connected parties at the expense of the pension fund, or vice versa.

Setting rent too low benefits the tenant (the business) at the expense of the SIPP — effectively subsidising the business using pension fund assets. HMRC treats this as an unauthorised benefit and can impose tax charges accordingly. Setting rent too high benefits the SIPP but could be treated as an excessive pension contribution made indirectly. Either deviation from market value creates a compliance problem.

The standard and most defensible method for establishing market rent for a SIPP property is a formal valuation by a RICS-registered valuer. The Royal Institution of Chartered Surveyors (RICS) sets professional standards for property valuations, and a valuation carried out under the RICS Red Book — the global valuation standards — is considered authoritative by HMRC and SIPP providers alike.

The valuer will assess comparable letting transactions in the local market, consider the property's condition and specification, review the lease terms proposed, and produce a written report concluding the estimated market rent range. Most SIPP providers will insist on this report before they will agree to the lease terms at the commencement of the tenancy and at each subsequent rent review.

It is important that the RICS valuer is genuinely independent — they cannot be connected to the member, the business, or the SIPP provider. Your solicitor or SIPP provider can often recommend suitable local firms.

Commercial property rental valuations are built on comparable evidence — actual transactions involving similar properties in the same or comparable locations. The valuer will look at recent lettings of similar floor area, specification, and use class in the local market and derive a rate per square foot or square metre. This rate is then applied to the subject property, with adjustments for factors such as age, condition, access, parking, and any special features.

In markets where comparable evidence is thin — rural locations, specialist property types, or unusual sizes — valuers will exercise more professional judgement and may cast the net wider geographically to find appropriate comparables. In these cases, the written rationale for the valuation is particularly important to retain.

The lease structure also affects rental value. A shorter lease term, or a lease with more landlord-friendly break clauses, may command a lower rent than a long, unencumbered term. Conversely, a lease with upward-only rent reviews may attract a premium. Your valuer should advise on the rental implications of different lease structures before the lease is finalised.

Market rent at the start of a lease does not remain the correct market rent forever. Commercial property markets move, and a rent that was appropriate in 2019 may be significantly above or below market by 2024. For this reason, commercial leases include rent review provisions that allow the rent to be adjusted periodically — most commonly every three or five years.

In a SIPP connected party context, rent reviews are not just commercially sensible — they are a compliance requirement. HMRC expects the rent to reflect market value at all times. If a rent review comes up and the parties simply do nothing, allowing a historic rent to continue unchallenged, the arrangement may fall out of compliance if market rents have moved materially.

At each rent review, a fresh RICS market rent assessment should be obtained. This need not be a full formal valuation report — in straightforward cases, a letter from a RICS valuer confirming the current market rent may suffice. However, retaining contemporaneous evidence of the review outcome is essential. See our article on RICS valuations for SIPP property for more detail on the different levels of valuation evidence.

Start the valuation process early — ideally two to three months before the intended lease start date. RICS valuers can be in demand, and SIPP providers require time to review and approve the valuation before the lease can be executed. Rushing this process is one of the most common causes of delay in connected party transactions.

Keep all valuation reports and correspondence in a dedicated compliance file. HMRC may enquire into SIPP property arrangements, and being able to produce contemporaneous evidence of market rent at the inception of the lease and at every review date is your most effective defence. Your SIPP provider should also retain copies as part of their scheme records.

If market conditions change significantly between scheduled rent reviews — for example, if the commercial property market in your area has moved sharply — consider whether it is appropriate to bring forward a rent review outside the scheduled timetable. This is a matter for your solicitor and valuer to advise on, but proactively managing the rent level demonstrates good compliance practice.