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Commercial property ownership through pension schemes

If you own a business then there are a number of tax and other advantages to buying your business premises through your own self-administered pension scheme.

Many of us see paying rent as ‘wasted money’, helping a landlord to build their wealth rather than our own. As a result many business owners prefer to own their premises rather than leasing. Using your pension to buy your premises is one way to achieve this.

If your pension owns your business premises you will still be a tenant, but your pension will be your landlord. And your pension, not a third-party landlord, will receive your rent.

Not only does this rent boost your pension, it is received tax free. And it can be treated as a business expense, therefore reducing your profits and your corporation tax bill. To do so, however, a formal lease must be put in place and arranged on commercial terms; you cannot give your business a better deal than would be available in the open market.

There are other reasons to own your business premises in your pension. First of all it is an investment and one which you hope will grow over time, providing you with an income in retirement.

If you were to own your business premises personally, or through a limited company, any profit when you sell it would potentially be taxable. However, owning the property through your pension means that no tax is payable if you ever sell it.

Also, owning your premises gives you greater control. No landlord can decide to sell up from under you, or unexpectedly or unfairly increase your rent. However, rent still needs to be paid on time and borrowing commitments must be met.

Two types of self-administered pension scheme

There are two types of self-administered pension scheme – small self-administered schemes (SSASs) which are for companies; and self-invested personal pension plans (SIPPs) which are for individuals.

A SSAS or a SIPP pension scheme can buy commercial land and buildings - including agricultural land - but currently they cannot buy residential property. A purchase of residential property by a pension scheme would result in an unauthorised tax payment and a scheme sanction charge.

When a pension scheme buys or otherwise deals with commercial land and buildings then your solicitors will not only need to deal with all the usual issues that arise on a commercial property transaction; they will also need expertise in the rules and issues surrounding pension scheme property ownership. Some of the these issues are:

  • A pension scheme may be buying the property from the connected company or person(s) that runs the business. And on any purchase from a connected seller the parties cannot simply agree the purchase price between them; instead the price has to be the market value as contained in an independent valuation by an RICS valuer. This also applies on any sale by a pension scheme to a connected party.
  • If, as often happens, the pension scheme lets out the property to the connected company or persons running the business, then the rent payable under that lease has to be the market rental value as, again, contained in an independent valuation by an RICS valuer.
  • If a pension scheme wants to buy a building that is partly commercial and partly residential (such as a ground floor shop with flats above); then it is normally necessary to structure the transaction so that the pension scheme’s interest is only in the commercial part of the building. This can be achieved by granting the pension scheme a 999 year lease at a peppercorn rent for the commercial part of the building.
  • In the case of a SSAS the pension scheme can lend money to the connected employer company subject to compliance with strict requirements; one of which is that the loan must be secured by a first legal charge. There is no equivalent right for a SIPP to lend to any of the scheme members.
  • A pension scheme can buy a property jointly with connected or unconnected third parties but there are then safeguards that need to be put in place.

These are just some of the issues that may occur. LCF Law has considerable experience and expertise in these areas and will help you to deal with all these issues. On any transaction we will ensure that all the regulatory requirements are dealt with whilst also ensuring that the transaction proceeds as smoothly as possible.

We like to work as a team with you, your financial advisers and with your pension scheme trustee/administrator. We often have work referred to us by either financial advisors or by a scheme trustee/administrator in order to help ensure that all the legal elements are properly established and covered for clients.

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