Keeping it in house! Buying Commercial Property Through A Pension Fund

8 February 2023

Keeping it in house! Buying Commercial Property Through A Pension Fund

Keeping it in house! Buying Commercial Property Through A Pension Fund

With the rise in taxes for ltd company owners, pensions can be an extremely useful tool to reduce taxes without necessarily ‘losing out’. One great example of this is buying commercial property through your own pension fund. Obviously this doesn’t cater for everybody, but for those who currently rent premises for their business, it can be a highly tax-efficient tool.

This is becoming increasingly popular amongst small business owners who choose to purchase their business premises through their pension scheme to take advantage of the tax breaks that are on offer.

Type of pension vehicle

Any old pension fund is not able to facilitate Commercial Property. The pension must be a Self-administered pension scheme. There are two types of self-administered pension scheme – self-invested personal pension plans (SIPPs) which are for individuals, and small self-administered schemes (SSAS), which are for companies.

Using SIPPs to buy commercial property

SIPPs are personal pension plans that allow the individual to choose where his or her pension savings are invested, rather than leaving that decision up to the pension fund manager. The range of investments that can be held in a SIPP is wider than those permitted in a personal pension scheme, and importantly includes investment in commercial property, an option which is not available under a personal pension plan.

Where the property is owned by the SIPP, rent can now be repurposed into your own pension. Rent is not subject to the annual allowance of £40,000 (or your salary if lower), as the regular payments are classed as growth not contribution.

Where rent is paid by the pension owner and property tenant, the ltd company can benefit from tax relief on the monthly payments. This can save up to 25% corporation tax, and dividend tax of 8.75%/33.75% (assuming the owner draws dividends over salary)

So as well as an immediate saving for the ltd company owner, the rent then goes directly into your pension in a tax free environment. When you’re ready to retire, 25% of the total value of the pension can then be drawn tax free (up to the LTA). – it’s a win win!

The SIPP provider acts as the trustee of the SIPP and manages the SIPP on behalf of the members. Where property is purchased through the SIPP, it is the trustees who are the legal owner of the property.

It is not necessary for the SIPP to be able to buy the property outright as it is permissible to borrow up to 50% of the value of the property. This is particularly useful if the pension fund is not large enough to meet the full cost of the property.

What type of property can you purchase through a pension?

A SIPP is permitted to own a commercial property outright, but not a residential property. While it is possible for a SIPP to invest in a residential property, this can only be done as a small part-owner where the property is not for personal use and via a genuinely diverse commercial vehicle, such as a real estate investment trust (REIT). The restrictions on residential property mean that in most cases SIPP property investment is restricted to commercial property.

Permitted investments for a SIPP include business premises, factories, offices, shops etc., as well as hotels, care homes and prisons. Investment in student halls of residence is also permitted, but not flats or houses let

Case study to demonstrate property purchased through a pension

John Smith runs a family business in Stoke on Trent with his wife and sons. The Stoke based business has rented a large industrial unit in Newcastle for ten years, however the lease has now ended and the rent has doubled to £50,000pa

Both John and his wife are able to use their SIPPs, valued at £400,000 and £250,000 respectively, and purchased a new commercial premises through their SIPPs. The premises will be held by 2 SIPPs on a proportionate basis. They can look for a property worth £650,000 or less (baring in mind that Stamp Duty will need to be paid), or they can borrow up to £325,000 on a mortgage that the SIPP will own.

John and Sue proceed with buying a property worth £500,000 through their pensions. Giliker Flynn provided independent financial advice to help transfer their pensions into two SIPPs with a Commercial Property specialist provider. The valuer and SIPP administrator agree the rent at £30,000pa, and now John’s company will pay £2500 a month directly into their own SIPP’s rather than losing the money to a third party landlord.

Buying commercial property through a SIPP: ‘Win-win’ situation

As demonstrated by the above case study, buying commercial premises through a SIPP can be a win-win situation, partly as a result of the tax benefits available and partly because any rent paid for the commercial property is not lost to a third party.

Is this something that may benefit or interest you? Here at Giliker Flynn we specialise in pensions, and we are able to provide regulated, independent financial advice on pensions and Self Invested Pensions (SIPPs). We are a Newcastle-under-lyme and Stoke-on-Trent based IFA and our financial advisors / financial advisers are Chartered members of the Personal Finance Society and Chartered Insurance Institute. We are fully regulated by the FCA and have over 15 years’ experience.