Technical Articles – The Use of Company Pension Contributions to Buy Your Own Commercial Property

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The use of company pension contributions to buy your own commercial property.
If you get an opportunity to buy the premises from which you operate then this can be an opportunity not to be missed.  There are many practical advantages of being your own landlord, but if done in the correct way then there can also be significant tax advantages as well.

Surplus cash held within a company is not easily going to earn much of a return, and is going to have to work hard just to keep pace with inflation.  Alternatively, it could be used to make pension contributions of up to £50,000 (see note 1 and 2) per year per director/employee (see note 3) without any additional tax charge.  Indeed, from the company’s perspective, the pension contributions are fully deductible against corporation tax, providing that they have been physically paid before the company year end.

For example, a £100,000 pension contribution would save £20,000 of corporation tax at the small profits rate (taxable profits up to £300,000), £26,000 at the main rate (taxable profits greater than £1,500,000), or £27,500 at the marginal rate (taxable profits between £300,000 and £1,500,000).

The pension contributions have to be paid into a Self Invested Personal Pension (SIPP) rather than to more mainstream large pension companies.  SIPPs tend to be made available by specialist pension fund providers.  The SIPP will have an administrator to oversee things (see note 4).

 As SIPPs are less common, there are not the economies of scale associated with some other pension products.  Typical costs for the set-up of a SIPP are around £500, and then you can expect to pay at least £500 in administration fees.  These costs will obviously vary depending upon the size and complexity of the scheme.

If you already have pension funds available, particularly if they are small, unloved pots, then these can also be transferred into your SIPP.  Many people have small amounts in their pension funds and have been reluctant to pay any more into them because of the poor publicity surrounding pension funds generally, or because of the poor returns that are still being achieved.  SIPsS are, on the other hand, just what they say: pension funds where you control the investments, albeit with professional guidance.

If the value within the SIPP pot is sufficient to buy the property outright then this is the ideal solution.  However, the SIPP itself can borrow up to 50% of its fund value as a commercial mortgage which many, if not all, providers are willing to fund.  So, for example, if the value of the property to be purchased is £300,000 then you would need at least £200,000 (remember there will be professional fees as well as SDLT (see note 5) and VAT (see note 6)) in the pension fund in order to complete the acquisition.

If you are planning ahead for a purchase in the future then you may consider investing in a simple stakeholder or personal pension fund where there are no set-up costs, low fees and no exit penalties for transferring funds.  If the acquisition is likely to be within 5 years or so then any investment should be as low risk as possible.

If you already own the property personally, or possibly the company already owns the property, then the SIPP can still buy it from you.  This is a fantastic way to release cash for either you or the company.  There will potentially be capital gains tax due on the sale to the SIPP, and this should be carefully considered when deciding if you wish to proceed.  As the transaction is between connected persons, it must be done at market value, otherwise the District Valuer and HM Revenue & Customs will become interested in potential tax avoidance.  With property values at a relatively low value at the moment, this might be an ideal opportunity for such a transfer so as to minimise the potential tax due.

Alternatively, if you own a property but do not have surplus cash then it is still possible to transfer the property to the scheme as an “in-specie” contribution. This could be done in one go, or in stages, depending upon the value of the property and the limitations on contributions that can be paid, as previously covered.

So, for example, if the property is worth £300,000 then you could transfer £200,000 in for the first year, and then £50,000 in for the next 2 years.  Each time a transfer is made, the property would have to be revalued, and the relevant percentage of the property transferred.  This might mean that it takes longer to complete the transaction than the 3 years above as the property might have increased in value in the meantime. You would need a solicitor for each transfer, and would also require a new lease agreement showing the changing percentages of ownership between you and the SIPP.

Once the property is inside the SIPP then a market rent (see note 7, 8 and 9) should be charged by the SIPP to the company.  So by acquiring the property you are not saving on rental payments, but at least the rentals payable are effectively to you. This rental payment is tax deductible in the company, and the contributions received can be used to either cover any mortgage payments due, or alternatively to build up funds within your pension pot.

Costs of ownership of the property can be offset against the rental income received, but any profits made by the pension scheme are not subject to tax anyway.  If the property is sold in the future then no capital gains tax is payable.  Also the value of the SIPP is deemed to be outside of your estate, and so is not subject to inheritance tax.

If the pension scheme owns the property, it will not be able to be used as security for any company borrowings, but equally it will not usually be available to creditors if the worst should happen.

On the down side, as with all pensions, there are limits on what you can do with the SIPP.  After reaching 55, and cash permitting, a 25% tax-free lump sum can be drawn.  However, the remainder of the fund must be used to provide an income for you, and is not available for you as a lump sum.

If you die before you draw either the 25% lump sum or an income from the SIPP then the fund can either be transferred in its entirety to your spouse with no further tax to pay, or your spouse can continue to draw an income from it for the rest of their life.  If you have already taken your lump sum, or started to draw an income, or on the death of the surviving spouse then the value of the SIPP can be passed on, but subject to a 55% tax charge.

In summary, you can use tax deductible payments from your company to fund a SIPP, which then buys your own premises, and then the tax deductible rental that your company pays  goes to further  fund your own pension.  You, therefore, have control over the pension payments, you know who both the tenant and landlord are, and consequently you are in total control of your own pension arrangements.  On the one hand you are putting all your eggs in one basket, but with the ever increasing pension age, and the potential for less support from the State in the future, this is a golden opportunity to take control of one part of your own destiny.

Notes

1. By careful use of the pension input period (which is the anniversary of when the SIPP is set up), 2 lots of £50,000 could be made in the first year. 
2. Additionally, unused contributions from the 3 previous years can be used, such that a £200,000 contribution is actually permissible, per director/employee.
3. The pension contributions cannot be paid to a shareholder who is not an employee.
4. Alternatively, if there are several directors, it might make sense to establish a Small Self-Administration Scheme (SSAS).  Rather than several SIPPs, one SSAS could be set up thereby saving costs.  A SSAS has the added advantage of being able to loan money back to the company, but has disadvantages in terms of all directors having to be trustees and all decisions having to be unanimous.
5. Stamp Duty Land Tax (SDLT) is payable on commercial property purchases at 1% on £150,000 to £250,000, 3% up to £500,000 and 4% thereafter.  If there is VAT on the purchase price then SDLT is on the gross amount.
6. Many properties are subject to VAT, and it is important to establish if this is the case from the outset.  It is possible for the SIPP to register for VAT, and thus to reclaim the VAT paid at the time of purchase.  However, if this is done then VAT must be charged on the rent paid to the SIPP, and VAT returns submitted to HM Revenue & Customs.  This is neutral if your company is VAT registered, but could be an additional cost if not.
7. A formal lease must be entered into at the time of the purchase and the rental will need to be independently assessed by a suitably qualified valuer.  The lease should normally be a full repairing and insuring lease. 
8. The length of the lease should be less than 7 years, or have a net present value (set by an HM Revenue & Customs formula) of less than £150,000, otherwise SDLT will be due at 1%.
9. The administrator will need to see various site surveys to confirm that the site is free from contamination and asbestos, as well as various other regulatory requirements about the suitability of the property.

 

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