1 Mar 2017
Jeff Steedman explains the importance of weighing up your options and seeking sound financial advice before using pension products to buy commercial property.
Jeff Steedman
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Image: © Polat Alp/Fotolia.
Whatever you have in mind, it is important you take regulated financial advice as rules and regulations exist that you will need to understand. The fundamental consideration is whether your pension is, or can be, in a position to buy some or all of the property, and this will depend on how much the property costs and how much you already have in your pension pot.
If you have multiple schemes, it may be necessary to consolidate your pension assets, but you will need advice regarding this as it may not be sensible to do so – particularly if you have “defined benefits” pensions. In my experience, however, most vets will have one or more “defined contribution” pensions, which are very easy to consolidate into a SIPP or SSAS, or they may already be in one.
Where a funding gap exists, additional ways of financing exist – for example, paying new contributions to your pension, which attracts tax relief from the Government. You could also ask your spouse or business partners to use their pension plans to join the scheme. Another option is a loan to part-fund the purchase, as a SIPP or SSAS can borrow up to 50% of its net assets to help buy property. Or you can part purchase if the full purchase is not achievable today.
As with any investment, benefits and risks are associated with holding your premises in a pension. As your pension scheme (via the trustee) owns the property, you (as the tenant) pay rent to it, which not only grows your pension fund, but is also treated as a company expense for tax purposes. Additionally, if you own the property in a personal/company capacity and sell it to your pension, while there’s capital gains tax (CGT) to consider, you could choose to reinvest these funds into the business. Once the property is in your SIPP or SSAS, any increases in the property value are free from CGT.
Disadvantages and considerations include what happens if you die or need to access your pension fund and the property has to be sold, as this might take time; the property’s value may also fall. In addition, as you must always pay “market rate” rent, if the business gets into trouble, you need to remember your SIPP or SSAS trustee owns the property and becomes your landlord and, hence, you may need to negotiate lower rent payments. More generally, you will need to obtain consent from the trustee for any decisions on the property – such as building work and subletting.
Because of their complexity, SIPPs and SSASs can be more expensive than other types of pensions. In addition to fees for administering the SIPP or SSAS, there will be legal, surveyor, insurance and advisor fees, together with CGT, VAT and stamp duty land tax (or land and buildings transaction tax in Scotland) to consider. Although these must be paid from the SIPP or SSAS funds, this will reduce the amount available to invest.
Logistically, once you have made the decision, the process is fairly easy. You transfer your pension(s) and, with the support of a SIPP or SSAS provider and a solicitor, the pension scheme buys the property.
Your pension scheme then owns the property and it sets up a lease to your practice. You pay market rent to your pension until such a time as you want to dispose of the property – it really is that simple.
