With the opportunity to advise business owners on what to do with their pensions, the conversation regularly leads to the question, can I or should I use my pension funds to buy our business premises?

It could be the existing business premises, a potential new property or for some, the idea of holding a familiar asset in property in a pension is a more comfortable prospect than investment funds. 

This can be from familiarity from being used to dealing with and managing physical assets. So, when it comes to investing, their preference is for bricks and mortar rather than stocks and shares. 

In answer to the question, can you use your pension fund to buy a commercial property, the answer is yes, if you have the right type of pension. 

Only certain types of pensions will facilitate a commercial property purchase – a Self-Invested Personal Pension (SIPP) or a Small Self-Administered Scheme (SSAS).

In this article, we will focus on the SIPP and how business owners can you use this to buy a commercial property. Please note, you do not need to be a business owner to buy a commercial property through a pension, but this article will focus in on why business owners may want to consider it.

Below, we’ll highlight some of the advantages of owning a commercial property through a SIPP that could appeal to business owners.

Tax relief on contributions

When a business owner contributes to a SIPP to purchase commercial property, they can receive tax relief on those contributions. For example, a personal contribution to a SIPP can attract Income Tax relief, which can be up to 48% for those in the highest tax bracket, reducing the net cost of the contribution. Employer funded contributions, if meeting the Wholly and Exclusively rules, will be treated as a business expense and reduce taxable profits. This makes purchasing property more cost-effective compared to using post-tax profits or personal savings.

Once the pension purchases the property, it is leased back to the business or a third party. In effect, your pension becomes the landlord and benefits from the rental payments. 

Tax-free growth

Any rental income generated from the commercial property held in the SIPP is exempt from Income Tax, and any capital gains made on the sale of the property are free from Capital Gains Tax. This allows the value of the property to grow in a tax-efficient environment, enhancing long-term returns.

When a SIPP buys a property owned already by a business it creates an inflow of cash from the sale of the property.

Rent paid to the SIPP

The business can pay rent directly to the SIPP, providing a steady income stream for the pension fund. This rent is an allowable business expense, meaning it can reduce the taxable profits of the business. At the same time, the rent received by the SIPP is tax-free, benefiting both the business and the pension fund.

Diversification

Rental income can help grow the value of the pension. As surplus rental income builds up it can be retained in cash or invested for long term growth through investment funds, adding further diversification.

Any costs arising on the property can be paid for by the pension fund.

Rental income does not count towards the Annual Allowance of £60,000.

A SIPP can borrow up to 50% of the net fund value if required to help facilitate the purchase. 

You retain more control over the premises and rental requirements, meaning you won’t be at the mercy of a third-party landlord. 

As well as lending, it is also possible to combine SIPPs to help facilitate a commercial property purchase – for example, two or more directors in a limited company may combine their pension values to make a commercial property purchase. Each SIPP can be used to buy a proportion of the property and will receive a proportion of the rent.

Limited personal liability

When commercial property is held within a SIPP, it is segregated from the business owner's personal assets and liabilities. This separation means that if the business faces financial difficulties, the property within the SIPP can be protected by creditors.

It is important to highlight that there are risks associated with using your pension to buy a commercial property:

• The value of a commercial property can go up and down in value. Depending on local property markets, interest rate, economic policy etc you may get back less than you paid.
• If you are leasing the commercial property to a third party rather than your own business, you need to factor in a loss of rental income if the tenant decides to move or goes out of business. 
• If you are looking to retire and need to sell the property to generate liquid funds, you will be reliant on finding a buyer in line with your timescales. Selling a property quickly is not always easy. 
• Owning and managing a commercial property requires significant upfront costs and will require ongoing maintenance and repairs.
• Often a pension offers diversification from a business owner’s primary assets (their business) by holding a commercial property used by your business the income received from it will be linked to the ongoing success of the business.

Get in touch

For business owners, purchasing commercial property through a SIPP offers numerous advantages, particularly in terms of tax efficiency, control, and long-term financial planning. By leveraging these benefits, business owners can effectively grow their retirement savings while maintaining control over their business premises.

If you are considering using your pension to purchase a commercial property, then it is crucial to seek financial advice to make sure it is the right thing for you and your business. Please don't hesitate to get in touch with myself, your usual adviser or a member of our Wealth team.