Guest Post by James Randall of I.P.M SIPP administration as this is an issue I often come across and get asked a lot by business owners, particularly when they start to make sizeable profits.
It is often quoted that as a nation Great Britain has a close affiliation with all things bricks and mortar, whether this is buying your primary residence or building a property portfolio through buy to lets. This appetite for property shows no sign of abating despite ever increasing property prices.
You may be familiar with the idea that it is possible to purchase property through a pension scheme. However, this is restricted to commercial premises as residential properties are subject to high tax charges. For those individuals looking for a more tailored retirement plan or for business owners considering more creative ways of owning their company’s premises, owning a property through the tax efficiencies offered by a pension scheme can prove to be advantageous.
What Properties Can I Buy?
Most SIPP providers will permit the purchase of any UK commercial properties on a freehold or long term leasehold (over 50 years) basis and will consider land. Examples of which include:
* Shops / Restaurants
* Offices / Office Blocks
* Care Homes
* Dental / Physiotherapy Practices
While the above represent more traditional property types Self Invested Personal Pensions (SIPPs) have also been known to purchase more exciting things such as:
* Sporting Arenas
Why Consider Using a Pension?
Remember – it is still a pension!
Pensions are there to provide an income in retirement meaning that steady asset growth and investment yield are important considerations. With property prices on average increasing over the long term and rental yields locked in via an occupational lease, buying a property through a pension could tick both these boxes.
Unlike a personally owned investment property, the pension fund is exempt from capital gains tax (payable on the disposal of a property) and any rent your pension fund receives is exempt from income tax.
Added to these tax advantages, any personal contributions paid to a pension to fund the purchase attract tax relief at an individual’s highest marginal rate (subject to limits) and employer contributions are treated as a business expense i.e. they are tax deductible and exempt from National Insurance.
Where a property is VAT elected, pension schemes are also usually able to reclaim VAT payable on the purchase price and the rent received.
Helping Individuals and Their Businesses
Increasingly business owners look towards pension schemes to provide a solution to them owning their premises….
‘We are ready to buy a property…’
Gemma and Julie both run a successful shop and have built up significant profits in their business. The lease on their current property was due to expire and rather than re-new they looked to buy their own premises. They speak with their financial adviser who suggested that rather than buying the property through the business they should look at buying it through two SIPPs instead…
* Large employer contributions were made to the SIPPs of Gemma and Julie; these are tax deductible for their business
* As the property is owned by the SIPPs, Gemma and Julie’s business must pay rent for use of the building, however instead of paying this to a third party landlord they are paying this to their own pension. The rent is also tax deductible for the business and is not subject to tax in their SIPPs
* When the property comes to be sold there will be no capital gains tax liability
* Importantly for Gemma and Julie they retain control of the property through their SIPPs giving them peace of mind and security for their business as they know that the landlord will not look to sell the property from under them.
‘Our business needs a cash injection…’
Boris and Oscar run a manufacturing business which owns the warehouse from which they operate. They are experiencing a cash flow problem which they are confident will be short term as a new large order is due to start in the next 12 months, however in the meantime monies are needed for the business. Reluctant to take out a loan or put more personal monies into the company they approach their financial adviser
* Boris and Oscar both have various pension pots with numerous insurance companies which they consolidate into two SIPPs
* With the warehouse valued at £150k, £75k from Boris and Oscar’s SIPPs are used to purchase 50% of the warehouse from the company
* Instantly the cash flow of the business is boosted by £75k while 50% ownership of the property is transferred into the ownership of the two SIPPs
* Rent must be paid to the SIPPs for use of 50% of the property, which is a business expense and can accumulate within the SIPPs income tax free. No capital gains tax will be payable on the 50% of the property owned by the SIPPs
* Importantly the warehouse remains in total control of Boris and Oscar via their SIPPs, as opposed to selling part of the property to a third party investor.
What are the Drawbacks?
‘But its my pension, my property…!’
It is important to remember that the provider will be acting in a role of Trustee on their behalf and that HMRC impose certain guidelines in exchange for the generous tax treatment afforded to the pension.
The Trustee has to act in the best interest of the pension at all times therefore if an individual’s business occupies the property, rent must be paid; this cannot just be missed if an individual doesn’t feel like paying it! If an individual wants to change the structure of the building, Trustee consent will be required before work is carried out. If the property needs to be sold, it needs to be sold at a price that will be benefit to the pension fund. Failure to follow the rules can result in large personal tax charges!
Lack of Liquidity / Diversification
For all but the largest pension funds, a property will usually be the majority if not all of the pension funds assets. It is important to remember that while there are many opportunities for tax planning with pensions, they are in place to provide individuals with retirement benefits.
Therefore if an individual urgently requires their pension commencement lump sum, selling a property is not as simple as selling shares or a collective investment to fund this payment, so the payment could take some time. Similarly should commercial property prices fall at the time an individual wishes to receive benefits from their pension, this will have an impact on the amount that could be paid.
If you wanted an informal chat about the possibility of buying a commercial property through your pension scheme then please do no hesitate to get in touch
IPM is regulated by the FCA for establishing, operating & winding up a personal pension scheme only. We always recommend that an individual takes independent professional advice on any aspect of pension planning.