If you are a property investor or entrepreneur looking to diversify your retirement portfolio, holding property within a pension provides significant tax benefits. By taking advantage of these benefits, you can maximise your return on investment and secure a more comfortable retirement.
In this article, we will discuss how you can hold property in a pension scheme and the various tax advantages in doing so.
What is a SIPP?
A Self-Invested Personal Pension (SIPP) provides greater flexibility and control into your investments. You can set up a SIPP with most investment managers. This type of pension vehicle allows you to choose which funds you want to hold in your pension. It can also hold commercial property.
However, due to the nature of this type of pension, an independent trustee also sits on the SIPP board with you. Consequently, all decisions must be taken with their consent.
What are the advantages of using a SIPP to hold property?
When a tenant pays rent on a commercial property held in a SIPP, the money is paid directly into the pension. As a result, the rental income does not attract a tax charge as it is not deemed as personal income.
When a property is purchased by a SIPP, rent payments must be made into the pension. If the premises will be used by yourself or your business, you still have to pay market value rent to the SIPP. Fortunately, that rent effectively means you are paying money to your own pension in a tax efficient manner.
Selling property which is held in a SIPP will not trigger a Capital Gains Tax (CGT) liability. Any growth in property value belongs to the pension; and therefore not subject to CGT.
As a SIPP is a pension, the value within can be passed onto beneficiaries as a death benefit. The value is outside of your estate for Inheritance Tax (IHT) purposes. This will save your loved ones paying a tax charge of 40% if your estate exceeds the nil rate band.
If you or your business are faced with financial or legal challenges, both the value of your SIPP, and any property held within will not be accessible to creditors. This reduces one of the biggest risks which can come with owning the property your business operates from.
What is a SSAS pension scheme?
A less well-known pension vehicle that provides much more control and freedom is called a Small Self Administered Scheme (SSAS). This can be set up as a company-sponsored scheme. Generally, the trustees of a SSAS are directors of the company and use the SSAS to make pension contributions on behalf of the directors.
It’s possible for only the directors to be the trustees of the scheme and, providing the directors are ‘fit and proper’ and know when to take advice about the investments held by the SSAS.
For peace of mind, there is an option to have a SSAS trustee company acting as co-trustee of the SSAS with the directors. The trustee company’s role is to make sure that:
- all investments made by the trustees are in line with the pensions legislation (so that the tax relief claimed is not jeopardised) and
- transactions between “connected parties” (between the trustees and the company) are all taken place at “arm’s length”.
For example, if the SSAS is buying a property from the company you have a situation in which the purchaser (trustees of the SSAS) and the seller (directors of the company) are essentially the same people.
In this case, it may be tempting to take shortcuts in the legal process, considering that both buyer and seller are the same. However, it’s important that transactions between connected parties take place as if the parties are not connected.
In the instance of a property sale, appropriate searches should be carried out. An Energy Performance Certificate and a property valuation must be obtained. A solicitor should be appointed to carry out the conveyancing. Any other steps that would normally be completed in such a transaction should also be fulfilled.
How much can be invested into a pension in 2024/25?
Currently, the ‘annual pension allowances’ grant a contribution of up to £60k per year on behalf of each director. However, the director’s total annual income must be less than £260k. If the director’s income exceeds this amount, they will have a tapered annual allowance in that particular tax year.
It is also possible to make contributions covering the previous three years, if those allowances were not used. Therefore if no allowances have been used in earlier years, a potential £240k contribution could be made for one director alone.
What can the pension invest in?
The rules outlining the investments which pensions can make are very strict. However, as long as it’s not residential property or anything “dubious” from an investment perspective, then it may qualify.
Holding commercial property is the most common use of a SSAS, and more often than not, the trading property from which a business operates. This provides the following advantages:
- Protected entity for the property in case of claims made against the trading company.
- Rents are received tax free in the pension to accumulate a fund for the Directors’ pensions.
- Rents are tax deductible for the trading company.
How do I get commercial property into a SSAS?
There are two main ways for a SSAS to buy a commercial property:
- The SSAS is funded by company with cash and / or mortgage to purchase the property.
- Or, the SSAS receives pension cash from other pension schemes to facilitate the purchase.
A combination of both 1 and 2 is plausible too.
Scenario 1: Company already owns the property where the business trades from
This is a common occurrence if the trading company has already bought the property. The property purchase could have been completed by using existing funds within the business or acquiring a mortgage facility.
Later down the line, the mortgage may have been paid off or significantly reduced. At that point the directors are keen to separate out the investment property from the trading business. There may also be surplus cash in the business available for the directors to extract.
In this scenario, a SSAS can be set up and funded by contributions from the company to buy the property from it. The transaction must be at market value as the SSAS will be considered to be connected with the trading company. This is because the individuals are the same on each side of the transaction.
Contributions made into the SSAS qualify for corporation tax relief. Furthermore, its possible to invest large amounts into the SSAS, which can reduce the corporation tax liability significantly.
As mentioned above, the company can potentially contribute £240k (2024-25) per director, assuming all pension allowances over the three years are available. This normally allows for plenty of headroom to facilitate a transfer of the property out of the company and into the protected SSAS.
Scenario 2: Directors are looking to buy a commercial premises
If there’s a property purchase on the horizon then exploring the acquisition through a SSAS could be beneficial.
When a commercial property is purchased personally, the funds need to be borrowed or withdrawn from the company. Neither of these options are ideal as they result in significant debt or personal tax liabilities.
If the company buys the property, then the deposit may already be available within the business. Therefore, no borrowing is needed. Despite this, the acquisition via a SSAS offers a unique advantage.
The main benefit is that if the deposit or full purchase is fully funded in cash, then it’s entirely tax deductible. In that case there’s essentially a cash benefit equal to the corporation tax rate of the amount of cash invested – currently 25%.
Here is an example:
Say you have found a commercial property you are looking to buy for £500k. Your company has enough funds to do this with cash.
You buy the property for cash and it sits on your balance sheet. There has been no profit or loss impact and therefore no change in your tax liability as a result of the purchase.
Lets say you purchase the property via the SSAS route instead:
You have available allowances among the directors to make contributions into the SSAS of £500k. This would generate a tax deduction in the trading company equal to 25% x £500k = £125k.
The SSAS buys the property and signs a lease with the trading company to rent it out at £36k per year. Each year the company gets tax relief on the rent it pays; this equates to 25% x £36k = £9k The £36k goes into the SSAS tax-free to build up the directors’ pension pots.
As per the above, there are unique tax advantages available to registered pension schemes including self-controlled ones such as a SSAS. Therefore having a SSAS as part of your overall tax-efficient structures should be considered.
Can a SSAS/SIPP borrow funds?
Yes, however a SSAS or SIPP can only borrow up to 50% of its net assets. So if you are short of funds and need to borrow heavily, then perhaps the full benefits of these vehicles may not be available to you.
However, you can buy smaller shares of a property and over time build up a larger share. In other words, the SSAS/SIPP can be a joint owner of the property with the company and buy shares in the property over time.
Gearing up to 50% in the pension can be beneficial because the rents received in return go towards paying off the debt a lot faster. As pensions don’t pay tax on any rents received then all the rent can be used to repay the debt.
Can I transfer funds from existing pensions?
Yes, you can. It’s also very useful to pool cash and consolidate all pensions in one place to facilitate a significant purchase.
All those pensions that you may have forgotten about can be valued. A notice can be sent to the provider to transfer the pension into your SSAS/SIPP. Given that it’s a registered pension scheme this is perfectly legitimate. There should be no issue with your pension provider agreeing to this.
I need help navigating tax-efficient structures. What should I do?
We recommend seeking professional advice before taking any action on the above. Feel free to get in touch with our specialist property accountants today. Let’s discuss how we can help you pay less tax and create a plan for your future.