Guide to commercial property pension investment
Though the digital economy is expanding, physical spaces are still an important part of most businesses. A property, such as an office, store, factory, or even a storage unit, is still largely necessary for many businesses to operate.
If you have a business that relies on a physical location, then you typically only have two options; buy or lease. While there are pros and cons to both, if you’re more interested in owning your commercial property, then you may want to consider using a pension to buy the space.
Commercial property pension investment can be a powerful way to build a tax-efficient retirement fund. So, let’s explore what’s involved, what types of pensions you need to use, and the unique advantage that rental income poses within this structure.
You have 2 options for commercial property pension investment: Self-invested personal pensions and small self-administered schemes
There are two primary pension plans that you could use to facilitate a commercial property investment. These are:
- Self-invested personal pensions (SIPPs), which are for individuals
- Small self-administered schemes (SSASs), which are for companies.
Both pension plans largely have the same rules around investments, borrowing, and loans but differ in other areas. Most notably, a SSAS is set up by a company for its directors or senior staff (usually no more than 11 members) while a SIPP is available to anybody who wants to save for retirement.
A SSAS is run by its members, who are typically the trustees and so all have direct control over the pension. A SIPP, however, is managed by the individual holder.
Furthermore, while SSASs can lend money to their sponsor company, SIPPs cannot lend to the holder’s business. That being said, both offer a broad range of investment options.
With both a SIPP or SSAS, you can purchase commercial property as well as invest in commercial and agricultural land. Once purchased, you can lease the property or land to your company or a third party. This could help provide a tax-free rental income as well as capital growth.
Examples of buildings classed as commercial property include:
- Offices or office spaces
- Retail units or shops
- Warehouse and factories
- Other buildings, including pubs, hotels, nursing homes, gyms, and more.
However, there are upsides and downsides to consider if you want to buy a commercial property with a pension.
Commercial property pension investment – The pros and cons to SIPPs and SSASs that you need to consider
Investing in commercial property through a pension can present both challenges and opportunities, so it’s important to be aware of all the considerations and evaluate the pros and cons carefully.
Ultimately, your needs and individual position will determine which route is right for you. Your financial adviser is well-placed to help you choose the right path forward, so be sure to discuss your options with them.
The advantages of commercial property pension investment within a SIPP or SSAS
One of the major advantages of using a SIPP or SSAS to buy commercial property is the tax-efficient income you could generate for your pension, as any rental income from the commercial property is tax-free.
Other advantages include:
- The property may increase in value over time, turning over more of a profit when it comes time to sell.
- If you sell the property at a profit, you are exempt from paying Capital Gains Tax (CGT).
- If the business fails or you are declared bankrupt, the property remains protected.
- Owning the property your business operates from can provide a sense of stability and control.
- You will receive Income Tax relief on your pension contributions, with the government adding 20% to account for Income Tax. Higher- and additional-rate taxpayers can claim back more through self-assessment.
The downsides of buying commercial property pension investment
One of the most notable disadvantages is that, if the value of the property falls, you may get back less than you invested if you decide to sell.
This might happen if you need to access liquidity from your pension pot, if the property is no longer generating sufficient income, or if there are concerns about the property’s value declining.
Other potential disadvantages include:
- Commercial property is considered less liquid than assets such as cash or stocks, as selling quickly can be challenging.
- You may have a less diverse portfolio if you have invested a significant portion of your pension in a single property.
- The rules governing property investment in pensions are strict and you typically cannot buy a residential property with a SIPP or SSAS.
- Navigating the regulations and complexities of this investment strategy can be challenging if you’re doing it on your own.
Pay yourself and benefit your business with tax-efficient rent payments
One of the most powerful aspects of this strategy is the interplay between the business and the pension. The business pays rent to the SIPP or SSAS, which is a tax-deductible expense for the business, reducing its Corporation Tax liability.
Simultaneously, this rent flows tax-free into the pension, bolstering retirement savings. If you’re a business owner and the commercial property belongs to you, this could create a win-win scenario, as both the business and your pension could benefit.
So, when you put money into a SIPP or SSAS, you’re not just saving for the future but actively helping your business save money tax-efficiently. For this reason, you may want to look for a commercial property that not only has the potential to appreciate in value, but that suits your business needs too.
Seeking professional financial advice is important for secure management and improved results
While the concept of owning commercial property within a pension may be attractive, it’s a complex area with specific rules and regulations.
For this reason, seeking professional financial advice is essential. A qualified adviser can assess your individual circumstances, recommend suitable pension providers, and guide you through the process, helping you make informed decisions that align with your long-term financial goals.
You don’t need to navigate this area alone, however, and we can help you unlock the full potential of your pension and commercial property.
If you would like to discuss commercial property pension investment to arrange an initial meeting with no obligation, please contact us at hello@rpgcc.co.uk or call 020 7870 9050 to speak to us. Or you can visit our web chat in the bottom right corner, which we respond to personally during office hours and you can leave a message out of hours.
The RPGCC team is always just a click or call away.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only. All information is correct at the time of writing and is subject to change in the future. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change. The Financial Conduct Authority does not regulate estate planning or tax planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation, which are subject to change in the future.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.Your property may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
The Financial Conduct Authority does not regulate buy-to-let (pure) and commercial mortgages.
