If your business operates from owned or rented premises, it's worth thinking about using your pension fund to acquire the property. Owning this property through your pension scheme has some considerable tax advantages that are well worth looking into.
The two types of self-administered pension scheme
The tax-efficient benefits act as a real incentive for you to own your business premises through a pension scheme. But what schemes are available to achieve this tax-efficient goal?
There are two key types of self-administered pension schemes:
- SIPP: Self-invested personal pension. This is a personal pension plan for a specified member. It can't lend surplus funds to a connected party and the member is in control of the plan (though you can use a professional administrator if you want to).
- SSAS: Small self-administered scheme. This is an occupational pension scheme with less than 12 members. All members are trustees of the scheme. It can lend surplus funds to the sponsoring employer.
Other rules re running the pension scheme
That's the basic outline of what a SIPP or SSAS scheme can do. But there are further rules regarding the management, investment and running of the scheme.
- Both SIPP and SSAS schemes can hold commercial property as fund assets, but residential property holding is severely restricted.
- Borrowing is limited to 50% of the fund value, so a fund with net assets of £200K can borrow a maximum of £100K.
- Taking an example where a director owns the property his company operates from, he can sell it to the pension fund (PF) but that has to be at market value. Alternatively, the PF can acquire suitable property.
- The company can make pension contributions within the normal limits to the PF and pay a market rent to the PF for use of the premises. Both expenses are tax-deductible by the company, and tax-free in the pension fund. That is far preferable to paying rent to a third-party landlord.
- Any growth in value of the property while it's held by the PF is free of any capital gains tax (a significant tax advantage for the members).
- On retirement (at age 55 or over) 25% of the fund value can be paid as a lump sum. There would have to be sufficient funds in the scheme to do this, of course.
- If the member passes away before retirement, the whole of the fund value can be paid out as a lump sum, free of any inheritance tax (another important tax benefit).
- The PF can invest in other assets as well, and isn't limited solely to property. The PF could invest in shares, unit trusts, bonds or even gold bullion!
Talk to us about SIPP or SSAS schemes
Before you enter into any investments and pension planning, it's a good idea to get professional advice on your plans. We can discuss broad principles with you, and if you want specific, actionable advice then we can put you in touch with an appropriate pensions specialist.
WIth the right planning and management, owning property through your pension scheme can be an excellent way to improve your property costs and your tax efficiency.
Get in touch to chat about SIPP and SSAS schemes.