Reasons to buy business premises with your pension

With growth in the digital economy and many people trading online you could be fooled into thinking that investing in commercial property is a risk too far but many businesses still need a property, perhaps an office, shop or industrial unit to trade from and land or farm buildings for our more rural clients. For most of those businesses you either have the choice to buy or lease.

Leasing a property is often considered ‘dead money’ and will not lead to any future gains but if you would prefer to buy there are many reasons to use a pension scheme to achieve this, here we will look at the benefits to the individual and business.

26th May 2021

Assuming buying commercial property or land is the right course of action and depending on your personal circumstance, there are two types of scheme that allow the purchase of land or property:

  • Self-Invested Personal Pension (SIPP) for individuals
  • Small Self-Administered Scheme (SSAS) for employers

For both types of schemes pension contributions qualify for tax relief.

Personal – You can receive up to 45% pension tax relief within a tax year when you make a contribution, the higher your rate of tax, the more you could receive.

Example for UK (not Scottish) taxpayer:

  • You contribute £8,000 into your pension
  • The Government adds £2,000, to make a total investment of £10,000
  • Higher and top rate taxpayers can then claim back even more via their tax return. £10,000 in a pension could therefore effectively cost a 40% rate taxpayer as little as £6,000 and a 45% rate taxpayer as little as £5,500.

Company – Pension contributions are treated as an expense when calculating your businesses profits and subsequently reduces the Corporation Tax due. Unlike salary, pension contributions are exempt from National Insurance of 13.8%.

The system of tax relief is one of the reasons pensions remain popular. As a business owner or individual buying a property, it means the taxman has contributed significantly to the cost of doing so.

There are many reasons to own your business premises in your pension but ultimately it’s an investment which you hope will grow in value over time and provide you with an income in retirement.

Should your pension scheme buy your business premises or land, the pension scheme will become the landlord and the business will be the tenant, the business will pay rent to the pension scheme by way of a formal lease arranged on commercial terms, to provide growth on your fund for retirement. The rent received by the pension scheme is completely tax free but rent paid by the business is still treated as an expense, thus reducing your profit and Corporation Tax bill.

If your business premises are owned by you personally, or through a limited company, any profit when you sell it would potentially be subject to Capital Gains Tax (CGT). However, if you owned it through your pension scheme, any gain would be free from tax.

Another advantage of owning your business premises in your pension scheme is to provide some security for your business, there wouldn’t be the risk of landlords selling up or increasing rent that would force your company into difficulty, in fact, the property would also be out of reach of your creditors should the business fall on hard financial times.

If you think this is a great idea but don’t think you have enough money in your pension to buy the property outright, there are many options to bridge the gap, these include:

  • Additional pension contributions – if you haven’t used all of your annual allowance for contributions each year, carry forward lets you take advantage of any unused allowance from the previous three tax years. That’s up to £40,000 from each year, subject to your level of earnings. Including the current tax year, that could mean you are able to make a pension contribution of up to £160,000 and receive tax relief
  • Pension transfers – if you have accumulated various pension pots from a variety of different jobs or personal pensions, it may be possible to transfer them all to one SIPP or SSAS
  • Joint ownership – it’s possible to buy a property with multiple owners or multiple pensions; this is a great option for business partners or a group of directors. This can also be a combination of SIPPs, SSAS’s, individuals, companies or third parties
  • Borrowing – SIPP’s and SSAS’s can borrow money from both banks and third parties up to 50% of its net asset value, the same way a business would, assuming suitable security is available.

There are many reasons buying a commercial property in your pension may seem attractive, however, the main purpose of your pension is to provide an income in retirement. It’s therefore worth considering issues that owning a property might create.

For example, if the only asset is a property, how will you create liquidity to pay out an income or the tax-free lump sum on your retirement? Will the costs of owning a property and running a SIPP or SSAS deplete your fund? Careful long-term planning, based on your future retirement objectives, is essential to avoid potential difficulties in the future.

Old Mill has a dedicated team of SIPP and SSAS experts who can assist you with your financial planning, executing a property purchase and ongoing support with property administration and accounting.

If you would like to discuss property in pensions in more detail, then please do get in touch.