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Should I buy property through a pension?

If you already own or are looking to buy commercial property then you should consider it.

Residential property cannot be held in a pension so if that's all your investing in then the rest of this article will be irrelevant.

Most people when they think about 'pensions', the big insurance companies and the pensions scandals come to mind. People don't feel that they are control of their pensions. They are at the mercy of the big pensions companies and the markets as to whether they'll be left with much of a pension in retirement or not.

There is another type of pension though. One that you can control.

It's called a SSAS (Small Self Administered Scheme). Typically used by owner managed business owners who can set up their own pension sponsored by their trading company.

The SSAS is set up as a Trust in its legal form. The Trustees can be just the Directors of the company i.e no independent Trustee from a pension company need be involved. Entrepreneurs and owner managed business owners like that as it keeps them in control of the underlying assets (of course, it is sensible to keep advisers on hand to avoid falling foul of pensions and tax legislation).

What are the advantages of the SSAS?

The SSAS is like any other pension and therefore the same tax advantages apply. This means a company can potentially make pension contributions up to £40,000 per annum on behalf of Directors which are tax deductible.

The SSAS does not pay any tax on the income it receives. Nor does it pay capital gains tax on any gains it makes e.g property gains.

How is a SSAS typically used?

A SSAS can invest in any commercial property. However, a common use of a SSAS as part of overall sensible tax efficient arrangements is where the SSAS purchases the premises from which the owner manager's company trades. The property can then be leased back to the company.

This achieves tax efficiency from two angles:

  1. rent paid to the pension is tax deductible in the company (saving 19%)
  2. rent received by the pension is tax free

Furthermore, tax efficiency can be greatly enhanced when structuring the purchase of the property.

Tax efficient structuring

Remember, any contributions made by the company are tax deductible - potentially up to £40,000 per annum per Director. If a Director has not used his / her allowances in the last three years, they can be carried forward too to make a potential allowance of £160,000 each.

If the company makes contributions into a SSAS to fund the purchase of a property then effectively there is a 19% discount being achieved on the purchase cost

(19% coming from the tax man in terms of corporation tax deduction). If a company or individual purchases property, this tax benefit does not apply.

Power tip ..

If the property is already in the company then the same strategy can be utilised to get the property into the SSAS. Not only will there be massive corporation tax savings but it will also take the property out of the company and into a 'protected' environment - i.e away from the jaws of potential creditors. We have helped several clients restructure their property holdings in this manner over the years.

The SSAS works well as a self-managed pension environment for the Directors. They are in control of the underlying investments i.e the rent generated from the property which comes from the trading business that they run.

Downsides

Yes, the SSAS is a pension after all which means that access to the pot cannot be obtained until age 55. However post 55 the first 25% of the pension's value can be drawn tax free and thereafter the remaining income is subject to one's marginal rate of tax.

Typically the pension would kick in for an owner manager once they've exited or sold the business and no longer have income in the form of dividends from the company for example.

Summary

If you need the income from your commercial property then a SSAS is not suitable. However, if you have a wider portfolio of assets and own the property from which your company trades or looking to acquire one, then consider structuring the purchase using a SSAS for both tax and commercial benefits.

Hope that was helpful.

Reza


 

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