Could holding commercial property in your pension be effective for you as a business owner?
Business owners always need to be on the lookout for opportunities to make their company even more effective and efficient.
Interestingly, one such method that you may never have considered is how you could use your pension to hold business property.
Whether you already own your business premises or not, holding property within your self-invested personal pension (SIPP) or small self-administered scheme (SSAS) can be a useful and tax-efficient tool for your company.
Here’s how holding commercial property in your pension can be an effective choice for business owners.
Take control of your business premises
If you don’t already own your business premises, buying and holding them within your pension can be an excellent way to take control of where you operate – albeit you would need to accept that this is a type of illiquid asset within the pension itself.
Currently, you’re likely paying rent to a landlord for your business premises. But what happens if that landlord wants to charge more? Or worse still, they decide to sell the premises to a developer?
Instead of having to worry about these eventualities, you could remove them as a possibility by using your pension funds to buy your premises outright. This would give you additional control over where you work, ensuring you can continue to do so on your terms.
Additionally, as your pension is your personal retirement fund, your pot will also benefit from receiving rent payments from your company. This ensures a steady stream of additional contributions to your fund.
Boost your company cash flow
Meanwhile, if you already own your business premises, you could use your pension to boost your business cash flow.
By using your pension to buy your business premises from your company, you could provide an injection of cash to your business’s bottom line.
You could then use this in any way you choose. You might buy machinery or tools that your business needs, or even renovate the offices or warehouses on the property itself.
Buying property through your pension in this way can be a great tool for sourcing a cash lump sum for the business.
Reducing your business’s tax liabilities
There are some key tax advantages to holding business property in your pension, too.
When you die, property you own will likely be included in your estate. As a result, this could put your family in the position of having to pay Inheritance Tax (IHT) on your business premises.
But, as your pension will typically fall outside the value of your estate, holding the property in it instead could actually reduce your IHT liability.
That means you could potentially save your family an IHT bill on the value of your business premises.
Remember: you’ll need to fill out an “expression of wish” form for your pension so you can select your chosen beneficiaries for your retirement funds. Read our other blog on this topic to find out why this is so important.
Capital Gains Tax
When you sell, or “dispose of”, assets such as property, you may be liable to pay Capital Gains Tax (CGT) on any gains in value.
There is an exempt amount before CGT is due, which is £12,300 in the 2022/23 tax year. But any rises in the property’s value that exceed this threshold could be liable for CGT.
So, for example, if you bought the premises for £600,000 and sold them for £620,000, you’d potentially owe CGT on the £7,700 gain in value that exceeds your exempt amount.
Meanwhile, by holding the property in your pension, you’ll be entirely free from CGT when you come to dispose of it.
Depending on your marginal rate of Income Tax, this could save you a tax bill of 18% or 28% on any gains in the property’s value.
One caveat here is that, if you’re moving a business property you already own into your pension, you may have to pay CGT on any gains in value since you bought it.
Of course, this will depend on whether these gains exceed your CGT exempt amount in the tax year you go to move the property.
Additionally, there would be no Income Tax due on any rent payments made to the fund from your business.
You may currently be paying Income Tax on rent you receive if you own the property personally. This could be as high as 40% or 45% if you’re a higher- or additional-rate taxpayer respectively.
So, by holding it in your pension instead, you could further reduce your tax bill.
You can split the property with your business partner.
A great feature of buying property in this way is that you can choose to share the benefits with your business partners if you wanted to.
Rather than using your pension funds alone to buy the property outright, your business partners could also use their pensions to purchase a portion of it with you.
This can be particularly useful if your pot isn’t quite sufficient to buy the entire premises yourself, meaning you’re still able to reap the benefits of doing so without needing to individually provide all the capital.
It also reduces the risk of you buying the entire property. For example, if you used your pension funds to buy the premises and its value then dropped, you’d have essentially lost a portion of your retirement savings.
So, by buying property together with a business partner or director, you can spread this risk between you.
You could borrow any shortfall through your pension
Alternatively, if you don’t have enough to purchase your property outright, you could choose to borrow through your pension instead.
In general, you can borrow from a bank or building society in your pension for up to 50% of your fund’s value. This may cover any shortfall between what you have and what you need to buy the property.
Obviously, the downside to this is that you would owe this money back with interest added. But, with the potential tax advantages and additional control you can take over your premises, it may be a cost-effective and prudent option for you.
There are important rules to bear in mind with this strategy, so make sure you speak to an expert if you intend to borrow money through your pension.
Get in touch
If you’d like to find out how buying and holding property could help you and your business, please get in touch with us at Britannic Place.
Email firstname.lastname@example.org or call 01905 41989 to find out more.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
The content of the article is for your general information and use only and is not intended to address your particular requirements. Articles should not be relied upon in their entirety and shall not be deemed to be, or constitute, advice. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation.