Using your pension to invest in commercial property

When talking about holding commercial property within a pension it’s easy just to picture office buildings, shops and industrial units. However, commercial property can also include commercial land. This article looks in detail at the pros and cons of Using your pension to invest in commercial property.

There are a number of reasons why you might want to consider buying commercial property or land through 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 land & commercial property?

There are two types of pension that can permit these assets to be held within the scheme, 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.

Can a pension borrow to fund a purchase?

In short, yes it can. It is sometimes overlooked, but the fact is that a pension scheme can borrow funds subject to certain conditions being met up to a limit of 50% of

scheme assets.

What type of property or land could a pension scheme buy?

The principle is that the property or land should be deemed commercial. As such, properties and land listed as residential will not qualify.

Therefore the pension could potentially purchase farmland and commercial buildings, but cannot acquire the family home or garden. These must be physically separate and independently saleable to ensure that the pension only purchases commercial property with no residential element.

The property or land must be income producing and the pension 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.

What is involved in buying property or land through a pension scheme?

The process can be more complex than if you were to buy the property or land yourself. This means that it can take more time. It should be remembered that pension

trustee approval is also required prior to the property being purchased.

The property or land 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 (known as a connected party transaction). You should consider the capital gains tax position at this point.

What costs are involved in using your pension to invest in commercial property?

The pension scheme will be responsible for the fees associated with both the 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 or land 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 business 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 or land, there could be opportunities to sell the property or land to a suitable pension scheme. This would allow the pension scheme to release funds to the business which can then be utilised by the business, for example, to help with future expansion plans.

What are the potential drawbacks of using your pension to invest in commercial property?

Trustee approval will be required before making any alterations to the buildings or land.

Regular rent reviews will be required to ensure that an open-market rent is paid.

Once property or land has been transferred to the pension scheme, these assets are no longer available as security for future business borrowing.

Holding property or land within a pension could present a lack of diversification. If the property or land was to fall in value or has a period where it is not tenanted, 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 is not available without securing a new tenant or first selling the property or land.