Buying commercial property through a pension fund

It can be highly tax-efficient to buy commercial property through a pension fund. This is 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

Self-administered pension schemes are used as the pension vehicle for the purchase of commercial property. There are two types of self-administered schemes – self-invested personal pension plans (SIPPs), which are for individuals, and small self-administered schemes (SSAS), which are for companies. These are known collectively as investment regulated pension schemes.

The range of investments that can be held in a SIPP/SSAS 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.

Contributions are paid into the plan either by the individual or by his or her employer. These attract tax relief.

Where property is purchased through the pension, it is the trustees who are the legal owner of the property, but in a SSAS the members are also trustees.

The pension scheme will be permitted to borrow up to half its value to purchase the property. For example, someone with a pension fund of £200,000 can borrow a further £100,000 to purchase a property for £300,000. This is particularly useful if the pension fund is not large enough to meet the full cost of the property.

Tax advantages

  • Contributions made to the pension scheme attract tax relief at the individual’s or company’s highest rate.
  • Rental income received by the pension scheme attracts no UK income tax.
  • Capital appreciation of a property held by a pension scheme attracts no UK capital gains tax.
  • On retirement, 25% of the pension fund can be paid as tax free lump sum.
  • On death pre-age 75, the whole pension fund may be paid as a tax free lump sum (i.e. no inheritance tax).
  • The property in the pension fund will be protected from creditors.

What type of property is permitted? (This is not an exclusive list)

  • Offices
  • Industrial units
  • Shops and retail units
  • Hotels and Inns
  • Hospitals, nursing and care homes
  • some leisure property e.g. golf courses, fishing rights, moorings and sports grounds
  • purchase of land and development of residential property, or conversion of a building to residential, provided the pension scheme disposes of the property before the development or conversion is complete (e.g. in the UK when the certification of habitation is issued)

Next Steps

If your company owns a commercial property or the directors own it personally and they have pension funds, consideration should be given to the pension buying the property from them, as this can be very tax efficient and can inject valuable cash flow in to the business or directors’ hands.

Buying, leasing, developing or selling a commercial property using a pension fund can be complex. At Cameron Chase we specialise in working with business owners and have helped many of our clients to use a pension to purchase commercial property.

If this is an area of interest we can are happy to meet with you and explain the mechanics and guide you through the process. Contact us here.

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