Do you have a business that trades from a premises? A warehouse, office, retail, leisure… If so, and if you have the opportunity; there may be some very real benefits to purchasing commercial premises with your pension.
There are two types of pensions that facilitate property purchases:
- A Self-Invested Personal Pension (SIPP), which is a personal pension where you control the investments. The range of investments that can be held in a SIPP is wider than those permitted in a typical pension.
- A Small Self Administered Scheme (SSAS), which is an occupational pension typically set up by the directors or partners of a business. Like a SIPP you control the investments, but in a collaborative way with other members. As such, each member of the SSAS is usually a trustee.
The opportunity in more detail
Contributions can either be paid by you as an employee, free of Income Tax, or by the business as an employer, free of Corporation Tax. Remember you can transfer any existing pensions in to your SIPP or SSAS to help fund the purchase of your property. Pensions from previous employment might be especially attractive if you were receiving “free money” employer contributions.
Your pension doesn’t have to fund the entire purchase alone; your SIPP or SSAS can usually borrow up to 50% of your pensions net value from lenders to help finance the property.
An important detail is that your pension, or rather the pension trustees, will be the legal owner of the property, not you or your business. Whilst this makes property alterations or changes of use more complicated (you’ll need to seek permission from the trustees), this does have inherent benefits. For example:
- You effectively rent the property from your pension at the appropriate market rate. Any rent received by your pension is free from Income Tax. Rent is also a legitimate business expense, which simultaneously reduces your Corporation Tax bill.
- Assets within a pension environment are not liable for Capital Gains Tax. As your property is likely to be held for a substantial time, it’s reasonable to assume it will increase in value quite significantly.
- If you or your business run in to financial difficulty and bankruptcy, the property, being held in a separate legal entity, would be protected.
The opportunity if you already own commercial property
If your pension purchases the property from you personally, you will be freeing up a significant amount of cash for personal gain. If your business previously owned it, you will be freeing up funds to invest back in to the business. If you didn’t own a property at all, no more lost money on rent; you will you be building equity and your retirement savings in one fell swoop!
The sale classes as a disposal for tax purposes which may consequently trigger a liability to corporation or capital gains tax.
Furthermore, death benefit rules make investing in commercial property very attractive, as upon death it can be passed down generations, in most cases free of Inheritance Tax.
If this is an opportunity that appeals to you, there are other points to consider:
- The capital value could fall, impacting your retirement income. There may also be a lack of diversity and hence increased risk in your pension portfolio, assuming the property makes up the vast majority of its value.
- There are SIPP/SSA, legal and surveyor fees to pay during the purchase, and ongoing administration fees after. They can be costly.
- If the business previously owned the property, it can no longer use the it as security for borrowing.
- A property is a largely illiquid asset and cannot easily be turned into cash. It may be difficult to sell, which could cause issues if you attempt to retire in a short time frame.
- Changing pensions providers, for whatever reason, will involve a change of ownership which is likely to be expensive and time consuming.
- With capital gains and ongoing rent contributions you may get dangerously close to, or exceed, the pension Lifetime Allowance of £1.03 million, triggering significant tax charges.
Whether the decision to purchase commercial property with your pension is right for you and your business depends entirely on your circumstances. Yes, it may be initially expensive and time consuming to organise, but the tax savings alone could be a significant benefit over time.
If you personally own the premises, or if your business owns the property, get in touch; you could free up significant cash whilst saving towards your future. If you rent and there is a suitable alternative for sale, now may be the time to stop funding your landlord’s retirement!