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Commercial Property and Pensions

The tax efficiencies offered through pension schemes make the option to hold business premises within them far more attractive than often thought.

Over the years pension schemes have received their fair share of criticism. The reasons for this are varied but often come down to one or a combination of the following – (1) a feeling that at times they have not performed as well as other investments, such as property; (2) a lack of control or choice in relation to how they are invested; and (3) confusion in relation to the rules surrounding them.          

In light of the above it is worth remembering that a pension scheme is merely a tax efficient structure capable of holding various investments, including commercial (not residential) property.

This creates significant opportunities, particularly for business owners. For example, if the business rents the premises from which it operates, the owner/s could potentially purchase a new or existing property and rent it back to their own, or even an unrelated business. Alternatively business premises that are already owned, either personally or through a business structure, could also be sold to a pension scheme at a commercial rate and then rented back for the same result.

The rental income would roll-up within the pension scheme without any deductions for income tax needing to be made. In doing so a business expense would become a retirement asset and potentially would not form part of an individual’s estate for the purposes of calculating Inheritance Tax on death.

In order to achieve the above a self-invested pension would need to be established. In the UK these typically take one of two forms – either a Self-Invested Personal Pension (SIPP) which tends to be arranged for the benefit of an individual, or a Small Self Administered Scheme (SSAS) which tend to involve a group and a sponsoring company. Any previously accrued pension policies could then potentially be consolidated into one of the above from which the purchase could then take place.

Given the initial costs relating to property purchase this will not be an option for everyone. However, it is worth remembering that self-invested pension schemes can borrow up to 50% of their net value to help fund a desired purchase. In addition, a number of individuals’ pensions could be grouped together in order to fund the purchase.

Using a pension scheme for a commercial property purchase can give to an individual that element of control over their retirement funds that they may feel they have been missing. At that stage the tax-favoured treatment of contributions and rental income can only add to the appeal.

Another point worth noting: The position is different if the pension fund owns the property as a member of a property investment LLP; in these circumstances, income derived from the property in the fund is taxable.



Date: 12th May, 2015
Author: Michael Lapham


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