Investing in commercial real estate through your pension

Introduction

Thanks everyone for joining this webinar. This is a very popular topic — using pensions to buy commercial property. We’ve done this many times with clients, and today’s session is primarily targeted at business owners who have reserves and the ability to put money into pensions.

However, it also applies to individuals investing in rental (buy-to-let) properties who may wish to explore this route for its significant tax advantages.

Agenda

Today we will cover:

• What is a commercial property?
• How can you buy one through your pension?
• The tax benefits and practical considerations.

What Is a Commercial Property?

A commercial property is one used for business purposes. Any property that has a residential element is not considered commercial.

Examples of Commercial Property

• Pubs
• Shops
• Factories
• Agricultural land
• Offices
• Clinics (medical, dental, etc.)

Residential Property (Not Eligible)

• Houses
• Residential flats
• Holiday homes
• Back gardens

A pension cannot purchase properties with any residential component.

Exceptions and Gray Areas

Sometimes, properties have mixed-use components:

• Shop with a flat above: The flat is residential, so the pension can only buy the shop portion if the deeds are split.
• Pub with landlord accommodation: The pub is commercial, but the residential part must be separated.
• Farm with a farmhouse: The farmland is commercial (agricultural), but the house is not.

In such cases, deeds must be separated before the pension can invest.

Who Can Invest in Commercial Property via a Pension?

Single Pension Purchase

If your pension has enough funds to buy the property outright, you can proceed directly.

Joint Ownership Options

If funds are insufficient, joint ownership is possible:

• Pension + Business: A business and a pension can co-own the property.
• Multiple Pensions: Example – three company directors pool their pensions together to buy a property. Rental income is split in proportion to ownership.
• Pension + Individual + Business: Various combinations are possible.

More parties mean more administration, but the flexibility allows creative funding structures.

Funding the Purchase

1. Using Existing Pension Funds
   You can consolidate old pensions from previous employments to increase your purchasing power.
2. Making New Contributions
   Businesses can contribute to directors’ pensions, and individuals can use unused annual allowances from the past three tax years.
3. Borrowing Through the Pension
   Pensions can borrow up to 50% of their net value.
   Example: Pension deep = £200,000 → Maximum borrowing = £100,000 → Total purchasing power = £300,000.
   Borrowing can be via a bank mortgage or a loan from your own business.
   If the loan is from your business, it must be on commercial terms with interest and repayment within typically 3–5 years.

Key Stakeholders in the Process

• Independent Financial Adviser (IFA): For guidance on consolidation, provider choice, and structuring.
• Mortgage Broker / Bank: To arrange lending.
• Estate Agent: To source the property.
• Solicitors: For conveyancing.
• Pension Administrator (SIPP Provider): To manage the pension and approve the transaction.

The SIPP provider ensures:

• The property is 100% commercial.
• The transaction is at market value.
• Any borrowing stays within HMRC limits.

Benefits of Buying Commercial Property via Pension

1. Outside Your Estate
   Pension assets lie outside your estate, meaning no inheritance tax on them.
2. No Tax on Rental Income
   Rental income within the pension is tax-free (unlike buy-to-let or company-owned property).
3. Corporation Tax Savings
   When a business contributes to a director’s pension, the contribution is treated as a business expense, reducing corporation tax.
4. No Capital Gains Tax
   Any growth in the value of the property is free from CGT when sold inside the pension.

Example: Business Owning Its Premises

A business currently rents its office but has sufficient reserves.

Steps:

1. The company contributes to the directors’ pensions (saving corporation tax).
2. The pensions buy the business premises.
3. The business now rents the property from the pension.

Outcome:

• Rent paid by the business is tax-deductible.
• Rent received by the pension is tax-free.
• Property is protected from creditors (owned by the pension, not the business).

Liquidity, Fees, and VAT

Liquidity Risk

Property is an illiquid asset. Selling takes time, especially near retirement, so plan ahead.

Fees

• Annual SIPP administration: approximately £500 per year.
• Additional fees for legal work, valuation, and mortgage arrangement.

VAT Considerations

• Some commercial properties are VAT-registered.
• SIPPs can also register for VAT, reclaiming VAT paid on purchase.
• When renting, the pension must charge VAT on rent and file VAT returns.

Example Scenarios

1. Business with Cash Reserves

A restaurant operating from rented premises could:

• Use company reserves to make pension contributions.
• The pensions jointly buy the restaurant property.
• The business rents it from the pensions, creating a tax-efficient cycle.

2. Contractor Business

An IT contractor with strong company reserves can:

• Contribute to a pension.
• Use the funds to buy commercial property.
• Rent it out to external tenants for tax-free income.

3. Individual Landlord

A landlord can:

• Sell one buy-to-let property.
• Contribute proceeds into a pension.
• Use it to purchase a commercial property through the pension.
• Benefit from no income tax and no capital gains tax within the pension.

Q&A Session

Q1. When buying a commercial property, do you also buy the business along with it?
No. The pension buys the property, not the business. For example, if you buy a shop, your pension owns the building, while you run your business separately and pay rent to your pension.

Q2. Does the 50% borrowing limit include business loans?
Yes. All borrowing — bank mortgage or business loan — must not exceed 50% of the pension’s value in total.

Q3. What if commercial property values decline?
You can:

• Continue renting it out for income.
• Sell it before or after retirement.
• Reinvest sale proceeds into other assets.

Pensions are flexible; you are not locked into the property forever.

Q4. What happens to rental income held as cash in the pension?
Surplus cash can be:

• Reinvested in funds or stocks.
• Accumulated to buy another property.

The pension remains self-invested, allowing diversification.

Q5. Can you buy residential property to convert to commercial?
No. The pension cannot buy residential property, even with the intent to convert. You must convert it before the pension purchases it.

Q6. Can a commercial property be converted into residential within the pension?
No. Once the property becomes residential, it must be sold out of the pension. You may develop commercial premises (e.g., offices), but not residential units.

Q7. Is rental income treated as a pension contribution?
No. Rental income is investment return, not a contribution. Contributions are limited by the annual allowance (£60,000 currently).

Q8. What if a shop has a flat above it?
The flat is residential and cannot be bought by the pension. The deeds must be split, allowing the SIPP to purchase only the shop portion.

Q9. Can part of the purchase be funded personally or through a company?
Yes. A property can have joint ownership between:

• Pension, and
• Individual or business.

Rental income is then split proportionally.

Q10. Can the same individual co-own the property with their own pension?
Yes. You can personally own part of a property and your pension can own the rest. Rent and expenses are split according to ownership share.

Q11. If owned 50/50 with a business, is rent taxable for the business?
Yes. The business portion of the rent is taxable and subject to corporation tax.

Q12. Which SIPP providers allow commercial property investments?
Specialist providers are needed. Examples include:

• InvestAcc (commonly used and highly experienced)
• Some others like AJ Bell may do it; providers like Hargreaves Lansdown typically do not.

Q13. What’s the typical funding required?
Varies by location.

• Smaller properties (e.g., shops in the North): from £50,000
• Around London: £250,000 – £400,000
• Average client deals: ~£300,000

Q14. Should tenants pay VAT on rent?
Yes, if the property is VAT-registered. The tenant pays VAT on rent (usually reclaimable if they are VAT-registered), and the pension must submit VAT returns.

Q15. How to plan if you don’t yet have enough in your pension?
Options:

• Build your pension through annual and carry-forward contributions.
• Consolidate old pension pots.
• Borrow up to 50% of pension value.
• Pool with another pension or individual as joint investors.
• Consult an IFA for tailored planning.

Conclusion

Buying commercial property through your pension can be:

• Highly tax-efficient
• Flexible in ownership
• Secure from creditors

While it requires professional guidance and administration, the tax advantages and estate protection make it an excellent strategy for both business owners and experienced investors.

Thank you all for attending. The recording will be shared soon — feel free to circulate it to anyone who might benefit.

If you have further questions or would like to discuss your situation, please reach out anytime.