Pension Scheme Property Acquisition - Commercial Premises Only

Purchasing property through a pension scheme has been popular amongst our corporate clients and we are here to ensure that this potentially problematic, but lucrative, option is transacted smoothly.

In principal acquiring property within a pension arrangement is simple. The value of your pension can be combined with a loan to purchase a property. The property is then an asset of the pension scheme and any rent received will be used to repay the loan with any excess rent being retained by the scheme. At retirement, you have the option to retain the property within the pension scheme and use the rent (subject to certain limits) as an income.

With careful planning you would prudently ensure that the loan was repaid prior to drawing an income in retirement and the value of liquid assets being held in the scheme would represent 33% of the property value - which ensures that you can draw the maximum 25% tax free cash associated to all post April 2006 pension arrangements.

The tax advantages associated to this option are vast. Firstly, you have received tax relief on the contributions that you have already contributed or plan to contribute to the pension scheme. Pension contributions are treated as a tax-deductible business expense when a company contributes and you receive tax relief at your highest marginal rate if you contribute personally.

Additionally, if your company were to buy the property for its own occupation, loan repayments would only attract tax relief on the interest element of the loan - not the capital repayment. Using the pension scheme option to purchase the property allows the company to enter into a lease with the pension scheme and the rent that is paid is fully tax deductible. The property, on disposal, is done so within the pension scheme free from capital gains tax but the proceeds of the sale will remain within the pension scheme.

You can draw a payment of 25% of the accumulated vale of the pension arrangement completely free from tax at retirement.

On death prior to drawing benefits the property would be sold and the proceeds paid to your nominated beneficiaries inheritance tax free.

From April 2006 purchasing a property through a pension scheme has been less favourable as the amount that can be borrowed has reduced dramatically. As a broad rule of thumb you are able to borrow 33% of the property value - requiring a deposit of 67%. A benefit of the post April 2006 rules is that you can split the ownership of the property - perhaps purchasing the property jointly between your company and your pension scheme.

All costs associated to the acquisition can be funded from the pension scheme. You should bear in mind that if the property you are considering is VAT elected, you are unable to bridge the VAT. The scheme is able to claim the VAT back, but it would remain within the scheme. This has an effect of reducing the amount that can be borrowed to 28%.

As you would expect there are some disadvantages. The property is an asset of the pension scheme, not the company or you personally. You cannot use the property therefore as security for further borrowing unless it is for an investment within the pension scheme. Additionally, you can only access 25% of your fund as a lump sum and realistically, you would need to dispose of the property by the age of 75, at which point the accumulated fund would be traded for an income for the remainder of your life (and your spouse if desired). The remaining fund on death after
the age of 75 would not be available to pass to your estate.