In our last blog we gave a brief overview of some of the ways in which your pension can help your business. In this our second article we look at one of those areas in more detail, explaining how you can buy a property in your pension.
Firstly a few basic rules
There are two types of pension which can buy property, a SIPP (Self Invested Personal Pension) and a SSAS (Small Self Administered Scheme).
Both a SIPP and a SSAS can be funded by a transfer in from existing pensions and / or new contributions from yourself or your business. We would always recommend that before any transfer is completed you take professional advice to ensure it is in your best interests and that you are not losing any valuable guarantees on your existing pension.
Only commercial property can be bought in a SIPP or a SSAS, residential property, for example your own home or a buy to let property cannot be held in a pension.
Borrowing
Both a SIPP and a SSAS can borrow money to help facilitate the purchase of a property.
The maximum which can be borrowed is 50% of the value of the fund and loans are usually obtained in the normal way from banks and building societies.
If your own business is planning on leasing the property, the lender will want to be satisfied that your business has the means to pay the rent, which will of course be used by the pension to make loan repayments.
Rent
The property always needs to be let out on a commercial basis and with a legally binding lease in place; you can’t give your own business any special deals!
When the rent is paid to the pension it is classed as a business expense and can be offset against profit in the usual way, however the pension pays no tax when it is received; one of the key advantages of buying property this way.
Tax
As mentioned above rent is received tax free, furthermore any rise in the value of the property is also tax free, making property ownership in a pension very tax efficient.
The advantages of owning a property in a pension
- The rent is received without the need for the pension to pay tax, although it is still an allowable deduction for your business
- Any increase in value in is not taxable, even when the property is sold
- The pension can borrow money to help facilitate the purchase
- For many people, without other realisable funds, it can be the only way to purchase a property to trade from
- The fact rent is paid to your own pension is for many business people preferable to paying rent to a landlord
The disadvantages of owning a property in a pension
- There is no guarantee that the property will rise in value, and could produce smaller gains than other investment options
- If for any reason your business cannot meet the rental payments your pension fund will suffer financially
- A SIPP may carry higher costs that other forms of pension planning, although in some instances the reverse can be true
Summary
SIPP commercial property purchase can be an attractive way for a business to effectively become their own landlord.
There are clearly downsides though and the advantages and disadvantages should be considered carefully before a course of action is decided upon.
We would always recommend that you seek independent financial advice to help weigh up whether buying a property in your pension is right for you.
