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We asked Tim Kirby of Wattam Kirby Mee in Leciester to write this guest blog for us. We hope you like it.
Around two thirds of adults in the UK own their own home according to the 2021 census. It is something many of us have been brought up on as the right thing to do and for many it is the biggest asset we own. We have seen some impressive growth in residential property prices and many people have made considerable returns from property.
It therefore comes as no surprise that many business owners also want to own property which their business trades from. In my 20 years in the industry helping with this type of transaction is a well-trodden path.
There are three main options to purchase the trading property of the business:
- In the business
- Personally
- In a pension
Quite often option 1 above has already happened and releasing capital whilst improving the tax efficiency of owning commercial property leads to a discussion about option 3. Option 2 can be quite tax inefficient but personal capital to purchase property is often needed so it isn’t uncommon to come across this scenario.
In respect of option 3, there are two pensions that can be used to purchase commercial property being a SIPP (Self Invested Personal Pension) or a SSAS (Small Self Administered Scheme). The latter has been in existence since the 1970’s but is only available to limited companies and from there we had the birth of the SIPP in the 1990’s allowing non business owners access to this opportunity.
Both of these pensions allow the investor(s) to choose where their pension monies are invested rather than leaving that decision to the pension fund manager. One such option is to own direct property which isn’t possible in other personal pensions.
Pensions are attractive due to the tax reliefs available on contributions, growth, income and any capital gains. Contributions plus using existing pensions and transferring these to a SIPP or SSAS can help to help fund property purchases. To further assist with funding, it is also possible to borrow up to 50% of the value of the pension, for example a pension worth £200,000 could borrow £100,000 to assist with the purchase.
Once the property has been purchased the tenant (your business perhaps) will pay rent to the pension which is tax deductible. Therefore, not only do people get tax relief on money going into the pension they also get tax relief on the rent. Within the pension there is no tax to pay on the rent received and any capital gain is also exempt from tax if the property is ever disposed of. The cherry on top of the cake is that pensions are also outside of the estate when it comes to inheritance tax.
A few extra bits to think about when purchasing commercial property in a pension:
VAT – a pension can’t borrow extra to fund VAT (a bridging loan) the VAT price is the gross cost to the pension so needs to be included in any calculations.
It is possible to buy a share of a property perhaps in conjunction with the business allowing a bigger property to be purchased and then look to move this fully into the pension later.
Stamp Duty is usually payable on any purchase, there are some exemptions to this and tax advice should be sought on this matter.
SIPPs can purchase property in conjunction with each other whereas a SSAS can have multiple members and is often an easier and simpler solution where there are multiple people involved in the transaction.
Pension rules are complex and often used as a political football so making sure the pension is aligned to your overall financial planning goals is vital. They are however there in the main to provide income in retirement and there aren’t many better ways then to collect rent and use this to pay a pension income.
I always say to clients, the best place to start is to talk through the situation and objectives and using a blank sheet of paper draw up the options available and decide how best to proceed but with an educated opinion on the options available.
Thanks for reading and #enjoythejourney.
This guest blog was written by Tim Kirby, co-founder and director at financial advisory firm Wattam Kirby Mee in Leicester. Tim has helped people achieve their goals since 2006. He works primarily with business owners, professionals and entrepreneurs and is passionate about helping clients create simplicity in their lives by delivering bespoke financial planning and achieving their goals. For more information, please visit www.wkmwealth.co.uk or call 0116 403 0138.
