Using a Pension to Buy Commercial Property - A Guide for Business Owners

This article is for general information only and does not constitute financial, pension, investment, tax, or legal advice or a personal recommendation. Commercial property and self-invested pension arrangements may not be suitable for everyone. Property values and rental income can fall as well as rise, and you may get back less than you invest. Tax treatment depends on individual circumstances and may change. You may wish to seek regulated financial advice, alongside appropriate tax and legal advice, before making significant decisions.

For many business owners, premises can represent a significant long-term financial commitment. At the same time, they may have built up pension savings intended to support them later in life.

That can raise an important question: could the pension hold the commercial property instead?

Using a pension to buy commercial property can bring business premises and retirement planning into the same financial structure. Rather than owning the property personally or through the company, an eligible pension arrangement may be able to purchase and hold it as an investment.

The decision involves more than the purchase price. Pension rules, commercial rent, borrowing, tax, property risk and retirement liquidity all need to be considered together.

Can You Use a Pension to Buy Commercial Property?

Potentially, yes, but not every pension allows direct commercial property investment.

A Self-Invested Personal Pension, or SIPP, is a type of personal pension that typically provides a wider range of investment choices than many standard pension arrangements. MoneyHelper's guide to self-invested personal pensions provides a useful overview of how SIPPs work.

Where an appropriate pension arrangement purchases commercial property, the property is held within the pension scheme. The precise legal ownership and trustee arrangements will depend on the pension structure and provider.

That ownership structure affects everything from rent and borrowing to the eventual sale of the property.

Commercial property that may be considered can include:

• offices
• warehouses
• workshops
• industrial units
• retail premises
• qualifying commercial land

Whether a particular property is acceptable will depend on the pension provider, scheme rules and the nature of the property.

Residential property is treated differently under pension tax rules. HMRC's guidance on taxable property held by pension schemes explains why direct residential holdings can create significant tax consequences for investment-regulated pension schemes.

Mixed-use properties and buildings containing residential elements therefore need particular care.

If you want to look more closely at the potential benefits and drawbacks, our guide to the advantages of buying commercial property in a SIPP covers that question separately.

How Does Using a Pension to Buy Commercial Property Work?

Buying through a pension introduces an additional layer of pension-provider, valuation, and scheme requirements.

A typical transaction may involve:

1. Reviewing the pension structure. Establish whether your existing pension permits direct commercial property investment or whether another arrangement would be required.
2. Assessing available pension funds. Consider cash already held, investments that may need to be sold, potential contributions, and whether borrowing is required.
3. Identifying the property. The pension provider will normally need to confirm that the property is acceptable under its rules.
4. Arranging professional valuation and legal work. This is particularly important where you, your company or another connected party is involved.
5. Confirming funding and costs. Allow for the property price alongside legal, valuation, financing, tax and other transaction costs.
6. Completing the purchase through the pension. The provider or trustees will normally be involved in the legal ownership arrangements.
7. Putting a commercial lease in place where needed. If your own company occupies the premises, rent and lease terms need to reflect a genuine commercial arrangement.
8. Managing the property as a pension asset. Rental income, repairs, insurance, borrowing, vacancies and an eventual sale all become part of the pension strategy.

Provider requirements vary, so it is important to establish what the pension can accept before making a binding commitment to a property.

Can Your Own Business Rent the Property From the Pension?

In principle, yes.

For some business owners, this is one of the main reasons the structure is considered. The trading company can potentially occupy premises held within the pension and pay rent to it.

However, the arrangement cannot simply be treated informally because the pension member and business owner are connected.

HMRC's pension scheme investment rules explain that transactions involving members, sponsoring employers and connected parties should take place on arm's-length terms. Where a sponsoring employer or member rents commercial property from the pension, the commercial rent due must be paid.

In practice, this means rent and other lease terms should be supportable by an appropriate professional valuation.

If the business pays less than the commercial rent due, HMRC rules can treat the shortfall as an unauthorised payment, with potential tax consequences. Rent and other terms should therefore continue to reflect an arm's-length commercial arrangement.

Transactions between the pension and the business also need to be properly documented and operated on commercial terms.

How Can the Pension Fund the Purchase?

A property purchase may be funded using existing pension assets, additional contributions, borrowing, or a combination of these.

Existing Pension Assets

Cash already held within an appropriate pension may contribute towards the purchase.

If investments need to be sold, consider how this changes the pension's overall investment mix. A commercial property may represent a substantial proportion of the fund, leaving less money invested elsewhere and less readily available cash.

Pension Contributions

Company directors may consider employer pension contributions as part of longer-term pension funding.

However, contribution levels should not be driven simply by the cost of the property. Pension allowances, previous pension access, company affordability and tax treatment can all affect what may be appropriate.

Our guide to director pension contributions explains the main checks that can apply before a company makes a larger contribution.

Pension Borrowing

A

 registered pension scheme may also be able to borrow to help finance commercial property.

HMRC's pension scheme borrowing guidance states that a registered pension scheme may borrow up to 50% of the net value of the fund immediately before the borrowing takes place, although other scheme, provider, lender or legislative restrictions may also apply.

That is a statutory maximum, not a recommendation or guarantee that a lender will offer that amount.

Borrowing also introduces additional risks, including:

• interest and repayment costs
• changing interest rates
• periods without rental income
• repair or maintenance expenditure
• falling property values

The pension needs sufficient liquidity to meet its obligations if circumstances change.

How Is Commercial Property Held in a Pension Taxed?

The pension tax environment is one reason commercial property may be considered.

Under current HMRC rules, income derived from most investments held for registered pension scheme purposes is generally exempt from Income Tax at scheme level, while qualifying gains on disposal are generally exempt from Capital Gains Tax.

For eligible commercial property, this can mean rental income received by the pension and qualifying capital growth may benefit from that pension environment.

These exemptions apply within the pension scheme. They do not mean that all benefits later taken from the pension will be tax-free. Pension withdrawals can be subject to Income Tax depending on how benefits are taken and the individual's circumstances.

Purchasing commercial property through a pension can also involve property transaction taxes, VAT where applicable, legal fees, valuation costs and financing expenses. The precise tax treatment will depend on the property and circumstances.

The treatment of rent paid by the trading company may also depend on the company's circumstances, so accounting or tax advice may be required alongside pension advice.

Tax treatment should not be the sole reason for putting commercial property into a pension. The investment still needs to be appropriate when liquidity, concentration, borrowing, property risk and long-term retirement objectives are considered.

What Are the Main Risks for Business Owners?

The risks often become more visible when the property is vacant, the business is under pressure, or cash is needed from the pension.

Concentration Risk

A commercial property can represent a large proportion of a pension fund.

If too much of the pension is tied to one building, retirement savings may become heavily dependent on one property, one tenant and one part of the property market.

Limited Liquidity

Commercial property cannot normally be sold as quickly as investments traded on financial markets.

That may become important if cash is needed within the pension for benefits, expenses or a change in investment strategy.

Business and Pension Risks Can Overlap

If your company is also the tenant, difficulties in the business may affect the pension at the same time.

For example, pressure on trading cash flow could make rent more difficult to pay while also reducing income received by the pension.

Ongoing Property Costs

The purchase price is only one part of the commitment.

Depending on the lease and ownership arrangements, costs may include:

• maintenance and repairs
• insurance
• valuation and professional fees
• pension-provider property charges
• borrowing costs
• periods without a tenant

Property Values and Rental Income Can Fall

Commercial property remains an investment.

Values can fall, tenants can leave, and rental income can be interrupted. Borrowing can magnify the effect of adverse changes.

Questions to Ask Before Proceeding

Eligibility is only the first test. The harder question is whether the property remains suitable for the pension over the long term.

Before committing pension funds, consider:

• Does your pension provider accept this property?
• Is any part of the building residential?
• How much of the pension would be concentrated in one asset?
• Will existing investments need to be sold?
• Is borrowing required?
• Will enough cash remain for fees and unexpected costs?
• Who will occupy the property?
• Is the proposed rent commercially supportable?
• What happens if the tenant cannot pay?
• Could the pension cope with a period of vacancy?
• How easy might the property be to sell when pension liquidity is required?
• How does the purchase fit with your other retirement assets?

These questions move the decision beyond whether the pension can buy the property and towards whether it fits the pension, business and long-term financial plan.

Bring the Property Decision Into Your Wider Business Plan

A pension-owned property can affect company rent, pension liquidity, borrowing and retirement planning at the same time.

For a business owner, those decisions rarely sit neatly in isolation. Pension funding may influence company cashflow, while the property itself may become closely connected to both the business premises strategy and your retirement assets.

If commercial property is becoming part of your pension strategy, our Business Planning & Employee Benefits service can help you consider how pension planning, company cashflow and your longer-term personal objectives fit together.

The key question is not simply whether commercial property offers potential pension tax advantages. It is whether the property remains appropriate once liquidity, concentration, borrowing, business risk and future retirement needs are considered together.

Using a pension to buy commercial property can bring business premises and retirement planning closer together. That makes joined-up planning more important, not less.

McCarthy Wealth Management is a trading style of Clarity Wealth Management LLP. Clarity Wealth Management LLP is authorised and regulated by the Financial Conduct Authority. This article is for information only and should not be treated as financial, pension, investment, tax or legal advice or as a personal recommendation. Property values and rental income can fall as well as rise, and you may get back less than you invest. Tax treatment depends on individual circumstances and may change in the future.