Pension Funded Property

by on 24·11·2015

For those seeking to purchase their own business premises or even an investment property, the issue of raising the capital to finance the purchase is usually the first factor to consider. Certain pension funds, namely bespoke SSAS & SIPP arrangements have wide investment powers and can assist with the purchase of commercial property, usually in the UK. Each property is normally considered on its own merits by the pension administrators and their prior clearance for inclusion within the pension fund will be required.

Individuals may have existing pension fund resources that can be transferred and pooled to assist with the proposed purchase. Furthermore and subject to HMRC limits, individuals or their employers might be able to make a significant pension contribution to help assist with the property purchase. Subject to a willing lender, pension administrator approval and HMRC limits, these bespoke pension funds can also borrow funds to assist with property purchase.

Usually, a combination of the above sources of capital are used to finance a commercial property purchase, but where there is still a shortfall of funds required, it may be possible for individuals to consider joint ownership with business partners or other connected parties. This often entails the pension fund owning the property with other parties or establishing a single pension fund with more than one member. Prior clearance with the pension administrator and any lender involved would be needed in such joint ownership situations.

To summarise, the main sources of finance include:

• Pension transfers
• Pension contributions
• Pension borrowings
• Joint ownership

The costs relating to the property purchase must also be considered and the pension fund needs to budget for such costs. Depending on the type of pension arrangement, these normally include:

• Legal fees and disbursements such as Stamp Duty Land Tax often payable on purchase.
• Chartered Surveyor fees
• Lending fees on commercial mortgages
• Property insurance costs (although often potentially recoverable from tenants)
• Pension Administration fees
• Property Management fees
• Financial Adviser fees
• VAT on purchase price on certain types of commercial property
• Accountancy fees

The tax efficient benefits of holding commercial property within a bespoke pension fund are well documented and include tax free rental returns on the property investment and freedom from capital gains tax. Furthermore, in the event of an economic downturn, the pension fund can normally protect your key property asset from any business creditors. This is because the pension fund is normally written under trust and is therefore a separate legal entity from the business.

The ongoing management of the property, whilst owned by the pension fund, should also be considered. Some pension administrators will insist on the appointment of their own property managers, legal advisers and chartered surveyors, whilst others will have a more flexible approach and may enable you to select your own preferred professional property advisers.

Like other investments, there are of course risks associated with owning and managing commercial property. It is key therefore for you and your financial adviser to consider the merits of direct ownership of commercial property through the pension fund. Your adviser will normally be able to assist you with some or all of the following points:

• Establish if you are eligible and suitable for SIPP or SSAS membership
• Agree on a suitable funding option bearing in mind HMRC limits and restrictions.
• Select a pension administrator to support your property investment over time.

The above does not constitute any formal advice, but highlights some of the main issues to consider when contemplating the purchase of commercial property through your pension fund.