Commercial property planning using Self Invested Personal Pensions

Purchase of Commercial Property

In the UK business market as a whole many commercial properties are owned by the person or the company that works out of them.  Pre-A-day if the property was brought outside of a pension then it could not be used to increase the fund either by buying into the assets or by using it for in-specie contributions.

From A-day the connected party rules were removed and this meant that every person or small company that owns a commercial property can review their options going forward.

Self Invested Personal Pensions have seen a change in pension planning from A-day and now that protected rights monies can be transferred into SIPPs the funds that can be used for purchase of commercial property have significantly increased.

The rules on borrowing through a Self Invested pension changed on A-day.  The pension can borrow 50% of the net fund, this can be added to the fund and used to purchase assets.

Basic case study;

Property worth	£300,000 owned by individual or company
Client pension fund	£200,000
50% fund borrowing	£100,000

The property can be purchased from the individual or the company.

What can this achieve?
- Cash from pension scheme can be used in the company or;
- Cash from pension scheme is paid to individual
- Rent is paid gross to the pension scheme
- Rent is an investment return and does not affect pension contribution levels
- Rent can be taken as income in retirement
- Property free from Capital Gains Tax on sale from pension

In these times of uncertainty a cash injection into a small company can make a considerable difference.  The property asset is not lost to an un-connected party.  The lending is to the pension scheme and not to the company so the rent that will be paid by the tenant goes into the pension gross and services the repayment of the borrowing.  Under the current rules with gearing at 50% of the net fund this repayment is normally set over a 5 to 10 year period.

If the property is owned by an individual then the pension fund purchases the property and the individual receives the cash.  For some people at the moment this can prove attractive.

One very important point to remember is provided you can find a provider that will allow 'Split ownership' it is not necessary to purchase the full property into the pension scheme.  This can allow more flexibility when looking at smaller pension funds and does not preclude clients or companies that own a large or relatively expensive property from considering using their pension funds in this way.

If a property is owned by two or more parties then the rent is paid in proportion of the percentage owned by each party.  When an individual wishes to take benefits provided there is sufficient liquid assets held in the fund they can take their 25% tax free cash for this part of the fund.  It is not necessary to sell the property at this point as the rental income can be taken as pension and the property or the party owned in the pension scheme can be sold on at a later date.

In-specie Contributiuon of Commercial Property

From A-day this option has been available and can offer individuals and companies a way to significantly increase pension funds whilst not having to find liquid funds.  Again the word of warning is to work with a provider that one, allows this and two, has experience and systems in place to offer a cost effective service.

Basic rules apply;
1. If the property is owned by the company the contribution will be an 'Employer Contribution'
2. If the property is owned by an individual then the contribution will be a 'Personal Contribution'

If the in-specie contribution comes from the company then they will receive corporation tax relief as they would on a normal 'Employer Contribution.'

If the in-specie contribution comes from the individual then the amount of the property that can move into the fund, giving full tax relief, is a net amount at basic rate against the individual's income.  Tax relief of 20% currently, is then claimed back into the pension and if the individual is a higher rate tax payer then the additional 20% is claimed back via their tax return.

If an individual contributes an amount equal to their income it is worth pointing out that they will be a nil tax payer.  This should be considered when there is a need to increase the personal income significantly to allow larger amounts of the property into the pension.

Combination of opportunities

Commercial property offers a real alternative to equity and cash investments in pensions.  Small businesses, the self employed and partnerships very often have funds tied up in the property that they work from and in these times of concern in the lending market use of pensions funds can really make a difference.

Groups that can benefit are:
- Partners
- Directors in companies
- Families
- Employees
- Property developers
- Un-connected individuals

Combination Case Study

3 architects purchasing property worth	£1,000,000
Pension funds of	£150,000 each
Total funds available	£450,000
50% borrowing of net funds	£225,000
Maximum purchase price	£675,000

Solution!
With joint ownership available

Pension fund purchase	£675,000
Individuals or company purchase	£325,000

Property owned                 67.5% pension
                                         32.5% individuals or company

This has achieved the initial purchase by using the next level of planning, in-specie contributions means they can either move individually owned portion in as personal in-specie contributions against their income or move company owned portion is as employer in-specie contributions.

A different perspective

The use of pension funds that are invested in shares at the moment may be appealing.  The equitty markets have not performed well over recent years and although commercial property values have also fallen; investing in an asset that is useable by the business has obvious attractions.

The rent as an investment return in the pension can offer a set return and the fact that it is paid in gross is a benefit.  The tax relief that personal in-specie contribution can attract may be a way to build up a tax free cash fund.  When a property has been moved into a pension fund it does not need to be sold to create an income in retirement as the rent can be taken as pension.

The financial uncertainty at the moment means that may individuals and small companies do not have a lot of liquid assets available for pension planning.

Use of commercial property as a contribution can build a pension fund and the tax benefits can add a bonus over and above the property value.

The availability of Protected Rights monies to assist in the purchase of commercial property offers some people more funds to use.

In Summary

This type of pension planning and funding is providing opportunities in these exceptional times.  Property is still a consistent performer in the normal market and when the property is still providing a place to operate the individual's business from and giving them an increased pension fund there is a reason to look at these options.

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