It is common for a business owner to invest in commercial property for both investment purposes and to protect the location of the business. Owning a commercial property in a pension scheme can be both tax efficient and give a structure where the business owner can still receive rental income after exiting the business.
Only SIPPs (Self Invested Personal Pensions) and SSASs (Small Self Administered Schemes) can hold commercial property investments. Contributions need to be made into the scheme to purchase commercial property. The pension fund can borrow up to 50% of the fund value to purchase business premises.
Most business owners’ long-term financial goals are to ensure that they have a source of income when they exit the business to retire. At Spotlight Accounting, we believe a business is here to give the owner the lifestyle they aspire to, and part of this is planning for retirement. Here we explain more…
Investing in commercial property
Many business owners buy commercial property as a direct investment in their limited company to protect the business premises and save money, as the interest on servicing the loan is often less than the rent paid.
Buying commercial property through the trading limited company is often not the most tax-efficient way of holding the investment or the right structure for a business owner’s long-term financial goals.
Also, if the business fails, putting the commercial property into a pension fund ensures that the property is retained, and the pension scheme will still receive commercial rent from the property.
Can you put commercial property into a pension scheme?
Commercial property is not just considered to be your commercial units on an industrial estate – it can also include office space and retail units. Pension schemes can invest in commercial property.
To do this, there needs to be either enough money in the pension fund either to buy the property outright or enough value in the pension fund to qualify for a pension scheme loan. A pension fund can also borrow money to make the purchase of up to 50% of the value of the scheme.
Only SIPPs and SSASs can hold commercial property. The first stage in putting a commercial property into a pension scheme is getting enough funds into the pension scheme to be able to make the purchase. This can either be through transferring existing funds from another scheme or making employer contributions from the limited company.
A company can make an employer contribution up to the annual allowance in pension contributions each tax year. This is currently £40,000. You can use up to three years annual allowance if you were a member of a registered pension scheme. These amounts could be restricted if you have a high income or have accessed your pension fund already.
An existing commercial property owned individually or jointly can be transferred into a SIPP or SASS. The value of the property essentially would be classed as a pension contribution instead of a cash payment. However, the annual allowance will still apply to this value, and capital gains tax and stamp duty will be payable on the market value of the property being transferred.
We always recommend getting professional advice from a chartered financial planner when looking at moving property into a pension fund, especially if you are looking to transfer pension funds, as individual circumstances differ.
How will this affect my own pension fund?
This all depends on individual circumstances. Factors that can affect this are:
- The value of the pension fund
- Fees and charges associated with the funds
- The value of the funds
It is fundamental that your accountant works with your financial advisor when looking at moving commercial property so that all personal circumstances are taken into consideration.
What are the tax implications of commercial property held in pension schemes?
Holding a commercial property in a pension can be a highly tax efficient way of holding commercial premises and getting value out of the business into an owner’s personal assets.
Tax breaks can include:
Corporation tax relief
Where an individual builds pension fund value through employer contributions, the company making the contributions gets corporation tax relief on these amounts. So, for example, if the Company was making three years worth of contributions to get a deposit on a commercial property into a pension scheme, then the tax relief would be £22,800.
If the company was to invest directly in commercial property there would be limited (if any) tax relief on the purchase price. Once the investment has been made, a formal lease would be drawn up between the company and the pension scheme for a commercial rent.
The rent that the company pays to the pension scheme is a tax deductible business expense and therefore, will reduce the amount of corporation tax paid. No tax is payable on the pension scheme’s rental income.
Income tax relief
Where an individual looking to use a personal pension plan to invest in commercial property is a high earner, a personal contribution can be made to build up pension assets. Tax relief will be given on these contributions.
Tax free lump sum on retirement
In most cases, 25% of the value of an individual’s pension savings can be taken as tax free cash. Property counts towards this value, therefore putting a commercial property into a pension scheme increases the value of this lump sum.
In general SIPP’s and SASS’s are not subject to inheritance tax. With inheritance tax being 40% of the value of the estate above the threshold on a £350,000 commercial saving, this could be a £140,000 saving to your beneficiaries on your death.
The main tax disadvantage to putting a property into a pension scheme is that purchase has to be made at market value (this would involve an independent valuation).
This could trigger a capital gains tax bill depending on:
- The difference between the purchase price and the value of the property when transferring to the pension scheme
- If the company previously owned the property or if it was personally owned
- Length of time the property had been held for
What pension schemes offer commercial property investments?
Only a self administered pension scheme can invest in commercial property.
There are two types of these schemes:
- Self invested personal pension (SIPP’s)
- Small self administered schemes (SASS’s)
SIPP’s are a type of pension scheme that enables an individual flexibility in the investments held within their pension wrappers. An individual can either manage their own investments, or use a financial advisor to manage the scheme for them.
SIPP’s can not be in joint names (this even applies to married couples) so they are not suitable if the intention is to hold property jointly.
SASS’s are normally set up by a sponsoring employer for a small number of key stakeholders. Typically these are the owner managers of the business, but the scheme can be open to other employees and used to bring family members into the pension investments.
The pension trustees run the scheme on behalf of the members of the scheme. These are normally the same individuals. The main benefits of a SASS over a SIPP is that family members can benefit from the scheme.
What are the benefits to putting property into pension schemes?
As well as the tax benefits discussed, there are many commercial benefits to putting property into pension schemes:
- It separates the investment in business premises from the trading business, so if the business fails then the owners still have the property as an asset, albeit in their pension wrapper
- It provides a vehicle to build up retirement funds for the business owner
- It helps to a business owners exit planning, as the business can be sold whilst retaining a central income for the business premises
- There is no tax payable on the capital growth (unless the fund exceeds the lifetime allowance)
Are there any drawbacks?
Initially, there are the potential capital gains tax and stamp duty costs involved with transferring an existing commercial property. If the property is transferred into a SSAS, then there are the ongoing costs of managing the scheme and preparation of annual accounts, but these are often a lot less than the tax savings.
The transfer needs to be made properly and without professional advice from a financial advisor and accountant, otherwise costly mistakes can be made.
Putting a commercial property into a pension scheme can be both tax efficient and a way of reaching financial goals. The transfer needs to be considered as part of a long term financial planning strategy.
There are various tax and pension implications that need to be considered when looking at transferring a commercial property, so it is fundamental that the right professional advice is taken.
At Spotlight Accounting we have a track record of working with clients that hold commercial property in a pension wrapper, and have transferred property into a scheme. We are here to help, so if you would like advice on how to get your commercial property into a pension scheme, then get in touch to discuss your requirements.
Do pension schemes accept residential property?
SIPP’s and SASS’s can not invest directly in residential property. There are some exceptions for residential property held before April 2006, and indirect investments held via a real estate investment trust or open ended investment companies. This is subject to meeting certain requirements.
How do you hold commercial property in a SIPP?
You would hold commercial property in your SIPP, in the same way that a limited company or an individual holds property. The SIPP will have its own bank account that the rental income is paid into and the costs of running the property are paid out of.
To learn more about pension schemes you can offer to your employees, check out this blog: