There are two types of pensions, namely SSAS and SIPP pensions, that can be used to purchase land and property. We act as financial advisors for many clients who have personal pensions and often these can be transferred into a SSAS or SIPP and used to purchase land and property (which will provide) and give tax advantages. It is an important financial planning consideration to decide whether some or all of your pension savings are best used to purchase land or property, particularly for business owners who might prefer their business premises being owned by their pension scheme;
- The rent received by the pension scheme adds to the value of the pension and is not subject to income tax.
- The rental income is not classed as a contribution and so you can still make a personal contribution equal to your earned income (subject to the annual pension allowance) and benefit from tax relief, or an employer contribution to reduce your corporation tax liability.
- The purchase releases a lump sum from pension scheme if the business or member owns the commercial property already.
- If the property is sold there is no Capital Gains Tax liability upon the capital growth. Again, the proceeds are added back to the pension scheme value.
- As pensions normally fall outside of the estate there is no liability to Inheritance Tax on death.
- A SSAS Scheme has the flexibility to be able to lend funds back to the sponsoring employer (more detail on this is in our Pension Loanback Knowledge Guide)
Using a SSAS or SIPP to purchase commercial property can be a way for business owners, who already own commercial business premises, to release a lump sum from their pension for business or personal use. This should be considered very carefully, and we recommend seeking financial advice before making any decision.
- Purchasing property/land could make up all or a significant portion of the scheme investments so the pension may not be appropriately diversified.
- Property cannot always be immediately sold, or sold for the ‘right’ price. This could mean that retirement or taking tax free cash on retirement age might have to be delayed until the property is sold.
- There is a reliance on having a good tenant who will pay rent regularly
- Generally, the initial charges to purchase a property through a pension scheme are higher and ongoing costs will continue to be taken even if the rent stops. There are usually also additional legal fees, stamp duty charges and the usual purchasing costs.
- Only Commercial Property can be purchased, the purchase of residential property is not permitted.
By having a discussion with one of our financial advisors we can discuss the pros and cons which apply to your own personal circumstances to decide if this type of financial planning is appropriate for your objectives.
What is classed as Commercial Property?
The list is quite extensive – Farmland, Woodland, Fishing Lakes, Equestrian/Stables, Golf clubs, Factories, offices, hotels, shops, care homes, prisons, and student accommodation (subject to conditions) are allowed.
- If, as part ownership of a hotel, the member stays in the hotel (either the part they own or any other room), it is classed as “residential”. However, if part ownership gives no preferential rights, it is “commercial” and therefore allowed.
- If the hotel or inn is owned outright, that is classed as “commercial”.
- Often a shop has a connected flat above it, this is classed as “residential” but ownership within a SSAS or SIPP will be allowed if the lease stipulates that the shopkeeper lives in the linked flat. Alternatively the lease would have to be severed to separate the residential element from the commercial.
- Student halls of residence are allowed if built for that purpose
- Residential care homes for children, disabled, elderly, are permitted.
- Ownership by the scheme of a hospital or hospice is allowed.
- Prisons are allowed
- Where the purchase is land, it must be income producing – i.e. able to generate rental yield and a formal lease needs to be in place. Rent needs to be set at market rate.
- Land must also have access to a public highway – this prevents the pension scheme acquiring a landlocked asset.
Under HMRC rules, if a commercial property is converted to residential, the property can continue to be held within the pension scheme during the conversion, but it must be sold before it becomes habitable – namely a “Certificate of Habitation” being issued.
What is classed as Residential Property?
As set out above, residential property is not permitted to be owned by a pension scheme and will result in considerable tax penalties. The only exception being if residential property forms part of a well diversified investment fund. The following are specific examples of residential property;
- Any building classified as Residential under Building Regulations
- Converted student lets – the HMRC has set out strict rules in relation to the layout of any student halls allowed to be held within a pension scheme.
- Timeshare properties
- A beach hut
- Timeshare property
- Overseas property
How does it Work?
The pension scheme can purchase a commercial property from an employer, scheme member or a third party. An independent valuation is carried out to ensure the transaction is at ‘arm’s length’ and the pension scheme is buying a legitimate property.
Once a pension scheme owns the property a lease on commercial terms needs to be arranged.
How much of the Pension can I use to purchase Commercial Property?
You can use all of the pension funds and borrow additional money to meet the purchase price of a property if required. The pension scheme can borrow up to 50% of the pension fund (minus any other borrowings that have already taken place). Loans act as a double negative – see the example below.
SSAS/SIPP value £500,000
Existing Loan £100,000
50% of the fund value is £250,000, minus the existing loan of £100,000 means that the pension could borrow an extra £150,000 if required.
Loans can be from individuals, third parties, or financial institutions providing they are on commercial terms (i.e. a repayment structure and interest payable).
In addition to taking a loan, you can pay for the renovation of commercial property using the funds in a SIPP/SSAS, providing that the renovations are for the benefit for the property.
This guide was written by Craig Croft-Rayner, an Independent Financial Advisor at Milestone Financial Planning. It is for guidance only and is not financial advice. Contact us on 01246 903 053 for a free, confidential consultation to assess your individual circumstances.