Using a pension is becoming an increasingly popular way for business owners to buy a property, from where they can base their business.
Naturally, there are advantages and disadvantages of buying a property in your pension so, here are 12 things you need to know about buying a property in your pension.
1. There are two pension options
To buy a property in your pension you will need a scheme which allows self-investment.
Most people immediately think of a Self-Invested Personal Pension (SIPP), however a Small Self-Administered Scheme (SSAS) can also be used.
Both options have advantages and disadvantages; your financial planner can explain these in more detail as can our video, which you can watch by clicking here.
2. It must be commercial property
It is almost never possible to buy residential property in a pension fund, that includes Buy to Let properties too.
As a rule of thumb, any property you buy in your SIPP or SSAS must therefore be classed as commercial; irrespective of whether your business, or another, will trade from it.
Our video explains more about the assets a SIPP is allowed to invest in; click here to watch it.
3. Your pension can borrow to help fund the purchase
Individuals and businesses can borrow money to help purchase a commercial property, so can a SIPP or a SSAS.
A pension can borrow up to 50% of its assets and many banks are happy to lend to a SIPP or a SSAS.
4. Tax-free
Your pension, irrespective of whether you choose a SIPP or a SSAS, will pay no tax on the rental income it receives or the increase in the value of the property.
However, the Lifetime Allowance, the maximum amount you can hold in your pension before tax charges are levied, needs to be considered. Set at £1,030,000 from 6 th April 2018, it may look large but it can be relatively easy to breach and takes careful planning if the tax charges are to be avoided.
5. Rent is still tax deductible
If you are renting the property to your own business the rent is still a tax-deductible expense, despite the fact your pension won’t pay tax on it.
6. No special deals
If you are renting the property to your business, it must be on commercial terms. That means putting a lease in place at a market rent.
Despite the hopes of some landlords, your business can’t have special deals, which wouldn’t normally be available to third party tenants.
7. The sale proceeds will go to your pension
If you sell the property, the proceeds, less any outstanding mortgage and costs, will remain in your pension and not usually be accessible until at least the age of 55.
8. Bridge the gap
If the purchase price of your chosen property is higher than the value of your pension it may still be possible to proceed with the transaction.
Of course, you could also make additional pension contributions, which will usually qualify for tax-relief (but speak to us to check limits on tax relief)further enhancing the tax-efficiency of buying a property in your pension.
9. Think ahead
Buying a commercial property in your pension might sound attractive and in many cases it can be. However, a pension’s main job is to provide an income in retirement. You therefore need to think about the issues owning a property might create.
For example, if the only asset is a property, how will you create liquidity to pay out an income or the tax free lump sum?
Careful long-term planning, based on your future retirement aspirations and objectives, is vital to avoid potential difficulties in the future.
10. Consider diversification
Diversification between asset classes (equities, gilts and bonds, as well as cash) is generally considered to be fundamental to successful investing.
Owning a commercial property in your pension will however concentrate a large proportion of your assets in one asset class. Indeed, you will be heavily exposed to one single property, which brings with potential risks. For example, how will your pension and retirement income be affected if your business, or that of your tenant, fails and can’t pay the rent? What affect would a downturn in commercial property prices have?
The issues created by a lack of diversification need to be considered carefully before proceeding with the purchase of a commercial property in your pension.
11. Be careful to choose the right pension provider
The temptation is to select your SIPP or SSAS based solely on cost. That would be a mistake.
Value, and price should certainly form part of the equation when choosing the right pension provider. However, expertise and service levels are at least equally important in what are sometimes complex and lengthy transactions.
12. And of course, choose the right financial adviser
If you are considering buying a commercial property in your pension, the benefits of having an experienced financial adviser in your corner are huge.
Starting with an in-depth discussion about your circumstances and objectives to decide whether buying the property using a SIPP or SSAS is the right thing to do, through to completing the transaction your adviser should be in your corner, offering support, guidance and advice.
Ideally your financial adviser should have expertise in tax-relief, self-invested pensions, commercial property and, if appropriate, borrowing and VAT.
That’s a combination of expertise and knowledge many advisers don’t have.
Fortunately, we do. If you are interested in learning more about whether buying a commercial property in your pension is the right thing to do, call us on 0116 240 7070 or email enquiries@boolers.co.uk.
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