Should you buy commercial property through your pension?

As a small business owner, you will almost certainly look to purchase your premises at some point. The most common route is through a commercial mortgage with a chunky deposit. However, there is another way. You can use your pension to buy commercial property, which your pension then leases back to your business. This option is available through either Self Invested Personal Pensions (SIPP) or a Small Self Administered Schemes (SSAS).

Here are my pros and cons of investing in commercial property through your pension.

Tax efficiency

Hold your commercial property in a pension is a highly tax-efficient investment. There is no tax payable on rental income paid from the business to the pension, and the rental continues to be a tax-deductible expense for the company. The rental payments do not form part of your pension contribution annual allowance. Once you hold the property in the pension, any future value growth occurs free from Capital Gains Tax (CGT). This means no CGT to pay if you decide to sell it in the future. Once owned by the pension scheme, the property sits outside of your estate for IHT calculations. For me, knowing that 100% of your business rent is funding your retirement plans is the cherry on top.

The ability to raise funds

Anyone who has tried to get commercial finance, especially in the North, knows it can be problematic and requires a significant deposit. When purchasing through your pension, you can raise up to 50% of net scheme assets. There are no restrictions regarding where your pension borrows from, only that this must be on commercial terms. As such, you can borrow the extra funds from a Business Angel, a friend or family member, even your own business.

Pooled Investments

You may not have enough in your pension to fund the purchase yourself. You can club together several pensions with the same provider, businesses and/or individuals to purchase your commercial property. This provides added buying power, for instance, a combination of 10 SIPPs, businesses or individuals with £100,000 each could buy a property for £1.5 million (£500,000 mortgage)

Future Development

The funds within the pension will build up over time from both contributions and ongoing rental and investment growth. The pension can pay any development and improvement works to the commercial property that is not specific to your business. It can even be registered for VAT to claim the VAT costs back.

Asset Protection

If you run your own business, you know the stress that it brings to the table. If your company gets into financial difficulties, your pension owned commercial property is ring-fenced from creditors in any future Bankruptcy proceedings. The pension is a separate legal entity, and as such, the liquidator cannot touch it, giving you an extra security layer.

There must be a catch

Of course, there are disadvantages to any and every investment. Here are a few of the main disadvantages of investing in commercial property through a pension:

As the SIPP will legally own the property, business owners can feel they have a lack of control
The property cannot be used as collateral for future loans to the company
As the company are will be the tenants, it will have to pay a market rent
The capital value of the property may fall
The SIPP will lack diversification if the property represents the main asset of the SIPP
Costs such as business rates, insuring and maintaining the property are incurred by the pension when the property is untenanted.
There are SIPP, legal and surveyor fees as well as taxes (LBTT) to pay to buy and sell the property

Whether to buy a commercial property through your SIPP or SSAS is a complicated decision. I would strongly recommend that you take advice from your Solicitor, Accountant and Financial Planner before moving forward.

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THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE COMMERCIAL MORTGAGES.

THE FINANCIAL CONDUCT AUTHORITY DOES NOT PROVIDE OVERSIGHT OF TAXATION.

LEVELS AND BASIS OF TAXATION MAY CHANGE AND ARE DEPENDENT ON PERSONAL CIRCUMSTANCES.

Should you buy commercial property through your pension?