There are a number of reasons why you, as a business owner, might want to consider buying your business premises by way of a pension.
Let’s remind ourselves of some of the reasons why this could be an option to explore, along with some of the potential risks that should also be considered.
WHAT TYPES OF PENSION CAN BE USED TO PURCHASE A PROPERTY?
There are two types of pension. A Self-Invested Personal Pension (SIPP) and a Small Self-Administered Scheme (SSAS).
A SIPP is an individual personal arrangement, whereas a SSAS is an employer sponsored occupational pension scheme. A SSAS can have more than one pension member.
HOW CAN I FUND MY PENSION?
Pensions can be funded by both personal and employer contributions. If you are making a personal contribution, tax relief may be available. Employer contributions have the potential for corporation tax relief.
The tax relief system is complex. Personal tax relief can inflate contributions. Where payments are made by the company (employer), pension contributions are one way to efficiently extract profit from the business.
In certain circumstances you may also have the option to transfer existing pension benefits into a new scheme.
CAN A PENSION BORROW TO FUND A PROPERTY PURCHASE?
In short, yes it can. It is sometimes overlooked however, a pension scheme can borrow funds subject to certain conditions being met, including a limit of 50% of scheme assets.
WHAT TYPE OF PROPERTY COULD A PENSION SCHEME BUY?
The principle is that the property should be deemed commercial. As such, properties listed as residential will not qualify.
The property must be income producing and the SIPP must be able to have the prospect to make a gain over the longer term.
A formal lease needs to be in place and the expectation is that rent will be set at a market value rate.
Typical properties include retail premises, offices, factory units and commercial units. However, farmland and woodland can also qualify.
WHAT IS INVOLVED IN BUYING A PROPERTY THROUGH A PENSION SCHEME?
The process can be more complex than if you were to buy the property yourself. This means that it can take more time. It should be remembered that pension trustee approval is required prior to the property being purchased.
The property will need to be valued on the open market by a RICS surveyor when you are selling a property to a pension scheme to which you have a connection (connected party transaction). Consider the capital gains tax position at this point.
WHAT COSTS ARE INVOLVED?
The pension scheme will be responsible for the fees associated with both the property purchase and general ongoing management costs. Professional fees and scheme fees also need to be considered. These costs can be expensive. However, most pension scheme providers offer a transparent fee menu with fixed fees for the services they provide.
WHAT ARE THE BENEFITS OF HOLDING A PROPERTY WITHIN A PENSION?
The rent can boost the value of the pension fund benefiting the business owner rather than a third party landlord.
The rent will be treated as a business expense, and therefore offsettable against both profit and the company’s potential corporation tax liability. Furthermore, the rent is received tax free by the pension scheme.
The pension scheme will benefit from the efficiencies of a tax shelter with no liability to either capital gains or income tax within the scheme. This would allow the property to subsequently be sold without giving rise to a capital gains tax liability.
Where the business presently owns the property from which it trades, there could be opportunities to purchase that property. This would allow the pension scheme to release funds back to the business. Funds could then be used, for example, to help with future expansion plans.
WHAT ARE THE POTENTIAL DRAWBACKS?
Trustee approval will be required before making any alterations to the building.
Regular rent reviews will be required to ensure that an open-market rent is paid.
Once the property has been transferred to the pension scheme, the asset is no longer available as security for future business borrowing.
Holding property within a pension could present a lack of diversification. If the property was to fall in value, or the property no longer has a tenant, this can impact on the pension scheme’s future value.
This may also present an issue if you are at a point where you need to start drawing your pension benefits, but access to liquid funds becomes difficult.
Paul Holt is a Chartered Financial Planner and a recognised Pension Transfer Specialist. This area of retirement planning is complex and we would recommend that you always seek professional advice to ensure that taking this route is right for you.
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