Using Pensions for Property Purchase

When looking at different funding options for business owners, we find that many overlook their pension – certain types of pension can be used for commercial property purchase, and therefore offer great flexibility when thinking about your business premises. It’s not possible to purchase residential property within a pension.

• Commercial property purchase is available within two types of pension plan – SIPP (self-invested personal pensions) and SSAS (small self-administered schemes). Other than leaving a cash balance to cover ongoing charges, the full fund value can be used for this type of investment.
• The pension scheme can borrow up to 50% of it’s net assets to help fund a property purchase. For example a pension scheme valued at £300,000 will have available scope of £450,000 for this purpose.
• Whilst many will have a number of pensions from periods of previous employment that they could look to amalgamate, it might be necessary to make additional contributions in anticipation of any property purchase. There is technically no limit on the level of employer-funded contributions to pensions (so long as these meet HMRC’s ‘wholly and exclusively’ test) however individuals will have their own ‘annual allowance’ to be mindful of – any amount in excess of this will be subject to a tax charge for the pension scheme member. The maximum contribution that could be made in one tax year is £160,000 gross (assuming full use of current and last 3 tax years’ unused allowances) but is dependent on earnings.
• As well as allowing an individual to build wealth outside of their business, one of the key attractions of owning property in this way is the tax position – whilst held within the pension wrapper there is no liability for either income tax (rental income) or capital gains tax (property sale). Under current legislation, pension plans also don’t form part of your estate for inheritance tax purposes.
• When rental income is generated, over and above the amount needed for mortgage repayments (if applicable) there are many options for investment of this within the pension – whilst any personal recommendation would be dependent on an individual’s own circumstances, we advise many clients on the accumulation of a general investment account (GIA) containing a portfolio of different funds aimed at achieving strong capital growth. Building additional value in this way allows for diversification of the plan, and offers flexibility in the future when looking to use the value to fund retirement.

Whilst there are some attractive benefits of owning property within a pension there are also drawbacks, and this isn’t a suitable option for everyone. It is therefore important to take advice before exploring this route. Without going into too much detail (as we could write another whole blog post on this!) some of the drawbacks are:

• Property may be difficult to sell and is not readily realisable – for this reason we wouldn’t consider this to be a ‘liquid’ asset within the pension and therefore it would be important to diversify. Without this diversification, you would be subject to concentration risk within the plan whereby you are too reliant on one single asset.
• The valuation of the property is purely assessed based on the opinion of the valuer, and different valuers could arrive at different values. There is no universal agreed valuation as there would be with something like shares or cash.
• Holding property in pension is not a low-cost option, as there are a number of additional fees that come with this – both on an initial (e.g. legal costs, stamp duty land tax, advice/provider fees) and ongoing basis (e.g. ongoing advice/servicing, annual reviews, revaluations).
• A first charge on the property will usually be required and any lending is subject to strict Terms and Conditions ‘TCs’. There are potential tax penalties if the TCs are not adhered to.

Five Wealth Ltd are specialists in pension planning and also have contacts who can advise on the financing options available.

The information featured in this article is for your general information and use only and is not intended to address your particular requirements and is based upon our understanding of HMRC legislation and practice at the current time.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). Your capital is at risk. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Allowances, reliefs and other tax legislation is subject to change and depends on the individual circumstances of the investor. SSAS schemes are regulated by The Pensions Regulator.