How to buy a commercial property through your pension scheme
13th October 2020
Steve Woodham See profile
You may know already a little about how pensions work, and for business owners there are a couple of other benefits which could help you before you retire, including buying a commercial property in the UK with your pension funds.
With the current COVID-19 pandemic many business owners are looking at ways to save or generate cash to help improve cash flow and buying your business premises through your pension pot is a highly tax-efficient method of doing just that.
Buying a business premises with your pension funds – How does it work?
Here’s an example of how this works – As an owner of a growing business you’ve decided that you need bigger premises for your company to grow. You’ve found a property you like and it costs £1 million and you have a pension pot with £1 million in too (lucky you!).
Your pension trustee will then need to agree that the building is a worthwhile investment and once you’ve completed all the necessary paperwork, your pension funds can be used to purchase the new property. That property is then owned by your pension.
The pension scheme then lets the property back to the business for an agreed rent. Every time that you pay your rental fees, the money goes into your pension and not to a landlord.
In effect, you have secured your business premises which is now classed as a tangible asset in your pension.
Commercial property pension ‘rules’ – What type of pension can be used?
You can purchase a commercial property with Investment Regulated Pension Schemes which are commonly known as Small Self-Administered Schemes (SSAS) or Self-Invested Personal Pensions (SIPP). These types of pension scheme can either buy the property outright or take out a mortgage to purchase the property.
Can you combine more than one pension fund from different people?
Any individual including an individual’s business can use their existing SSAS or SIPP pension funds for the purchase of a property. Individuals, including directors and employees are able to combine their pension funds together to jointly purchase a property increasing the purchasing power of the pension fund. Partial purchase of the property is also an option.
What if I don’t have enough in my pension pot?
If you don’t have enough in your pension fund to purchase the property, then it’s possible for the pension fund to take out a mortgage to help complete the purchase or use additional pension contributions.
By letting the property back to the business through a rental agreement the individuals and business retain control and use of the property. If a mortgage was taken out then the rental income generated to the pension fund would be used to fund the mortgage repayments.
What type of properties can be purchased with a pension?
Warehouses, retail units and offices all qualify. You cannot invest your pension into residential property.
Can the business buy any commercial property?
SIPPs and SSAS can buy any commercial property from any party, it doesn’t have to belong to your own business, whichever business then uses it would pay rent into the pension.
"Any future capital growth will be completely free from Capital Gains Tax"
What are the benefits of buying a commercial property through a SIPP or SSAS?
Using a pension fund to purchase a commercial property is very tax efficient as the rent paid into the pension fund is not subject to Income Tax. If the property is let back to the business the rent paid would be treated as a tax-deductible expense. Once the property is owned by the pension fund any future capital growth will be completely free from Capital Gains Tax.
Once a property is purchased by a pension fund from a business, the property no longer forms part of the business assets and would be free from any potential creditors of the business. This means that the property will be held in trust by the pension fund and securely held to be used to help fund an individuals’ retirement.
What are the risks?
It’s also important to remember that the main purpose of a pension is to fund an individual’s retirement. There are risks to consider, for example If the only asset in your pension is a property, and you are near retirement, it will be difficult to create liquidity to pay out an income or the tax-free lump sum, so it’s generally advisable to have a diversified portfolio. If you are considering buying a commercial property with your pension, you should seek financial advice.
While buying a property with a pension has its advantages, this is a complex area and we’d recommend that you get qualified advice before proceeding.
Old Mill’s specialist pensions team have a great deal of experience in commercial property purchases within pension funds and would be happy to discuss your personal circumstances in further detail. For more information get in touch.