Avoiding the problems of buying property in a pension
15 May 2018
Once a business becomes profitable and established, the owners will often look to purchase a property to trade from. This gives the business a foundation, an identity and it can also be a very good investment. But advice is essential in order to make the purchase go smoothly.
If you want to buy a commercial property a decision is needed on how you will own it; this could be within your existing company, a new company/partnership set up for property ownership, personally or within a pension scheme. If you explore each option it becomes difficult to ignore pension ownership as this has some fantastic tax breaks.
If you are considering buying a commercial property in your pension, here are the stages you will need to go through:
The correct pension provider
During the 1990’s most of the big insurance companies offered a SIPP (self-invested personal pension) and would allow property purchase. This worked well initially, however, they quickly realised that if you hold commercial property in your SIPP it isn’t very profitable for the insurance company! As a result, they began to impose restrictions on commercial property purchase, insisting that you use their selected solicitors, valuers, and managing agent, all at an increased cost.
I only recommend a suitable corporate SIPP provider for the purchase proposed (avoiding the big insurance companies), carefully checking the providers ability to complete the purchase in the proposed timescale, also ensuring any future plans for the property are possible.
The correct funds
Any existing pensions you have could be used for the purchase. They will need to be reviewed to ensure it is the right thing for you to do but can be transferred where suitable.
You will also need advice on how much can be contributed to your pension. Although pension contributions have been restricted in recent years it is possible to use previous years’ allowances to increase the amount you pay in and get tax relief on. This will all need to be done first, if you haven’t established the correct SIPP, transferred any suitable funds and made the necessary contributions, you will be ‘shopping without your purse’!
The correct bank
Your pension fund can borrow to fund the purchase and most banks will lend to a pension, however, this is usually through their centralised pension lending team, not your usual contact.
All assets within a pension are ring fenced from creditors and any lending within the pension has no recourse outside the pension – the bank cannot take a personal charge or cross charge on other assets, this does seem to cause a problem for some of the banks and can cause delays.
The correct solicitor
It is essential you have the correct solicitor and that they understand pension property purchase; the legal work should not cost any more than a normal property purchase.
You will need your solicitor to complete the conveyancing, advise on the lease, liaise with the bank and provide an agreement between the owners to deal with the issues you may face when owning a property with your business partner i.e. death, divorce, sale, retirement, etc.
Your solicitor should be experienced in pension property purchase and ideally have worked with the selected pension provider and bank in previous transactions.
How can Old Mill help?
I have been advising business owners, private clients and syndicates on pension property purchase since 2003 and have been involved in over £100m of property acquisitions. The Old Mill Pensions team have provided administration and accounting for pension schemes since the early 1980s. Through our combined years of experience we are able to offer our pension scheme clients a highly efficient and personal service including technical and investment advice. If you use the right team to provide advice and guide you through the process, it will go smoothly.
Old Mill is able to use the combined power of accountancy, tax and financial planning advice, as well as our established connections with solicitors and banks, to plan for and guide you through a pension property purchase. With the correct team in place, most pension property purchases are completed within six weeks.
If you are considering the purchase of a commercial property you should seek advice sooner rather than later, you may need to work up a plan over the next three to five years to ensure you are able to make the pension contributions required. In addition to all of the above, commercial property in the price bracket of most owner occupiers is scarce. If you don’t have everything in place, it is highly unlikely your offer will be accepted and if it is, the deal is likely to fall through.
Property purchase (an example)
What are the tax benefits?
If you are able to purchase a property in your pension, it can provide some compelling tax advantages. The following is an example of the tax benefits based on a purchase price of £500,000 (including all costs of acquisition), shared between three company owners.
• £111,000 company pension contributions for each owner, attracting a total of over £63,000 of corporation tax relief
• £45,000 rent paid into the pension from gross turnover of the trading business and no income tax charged within the pension
• No Capital Gains Tax within the pension
• No Inheritance Tax on pension fund
• VAT can be reclaimed within the pension
• 25% of the pension value can be withdrawn as a tax free lump sum once you reach age 55
• You have the ability to control the level of income drawn from the pension in retirement
If you would like to see if this could work for you, or if you already own commercial property outside your pension, please contact us.