If you run your own business, the rent you pay for your premises is probably one of your largest outgoings.
Many business owners begrudge paying rent each quarter, often seeing it as ‘dead money’.
However, despite interest rates remaining at low levels for nearly a decade, buying their own premises, often because they can’t raise the deposit that is required, is out of reach for many business owners.
A potential solution is available, which many business owners don’t know about, yet could mean an end to rental payments to a third-party landlord.
Using your pension to buy your business premises.
How does it work?
- You transfer your existing pension, or pensions, in to a Self-Invested Personal Pension (SIPP) or Small Self-Administered Scheme (SSAS) both of which have wider investment powers and can buy commercial property
- You use the new SIPP or SSAS to buy the premises of your choice; it has to be commercial, which generally can’t include any residential element
- If you don’t have enough money in your pension to buy the property of choice, there are options to make up the shortfall. For example, you could make additional contributions, which will qualify for tax-relief, or your pension could borrow money from a bank, in much the same way your business might
- Borrowing is capped at a maximum of 50% of your pension fund. For example, if you have £150,000 the maximum you can borrow is £75,000, making the maximum purchase price £225,000, less the costs you will have to pay
- The property will then be let to your business, on commercial terms; that means for a market rent, you can’t give your business a ‘special deal’ you wouldn’t do to anyone else
- Rent is paid by your business to your pension
- That rent is still a deductible expense in your accounts, but is received tax-free by your pension
- If you sell the premises the proceeds are retained in your pension, which pays no tax on the gain made
5 reasons to buy your business premises in your pension
There are several key reasons why buying your business premises in your pension can make sense:
1. It might be the only option
Generally, banks require a deposit of 30% before they will consider lending to a business. That’s a large sum of money which might be beyond your financial resources.
Furthermore, some banks will also require additional security, perhaps by taking a charge on your home, or asking you to sign a personal guarantee for the loan. Many business owners will find those requirements unacceptable; frankly we don’t blame them.
If your business can’t borrow the money to buy your premises, or you aren’t happy with the terms being offered, using your pension may be your only, or at least a better, option.
Remember too, your pension can borrow up to half of its value to help fund the purchase.
2. The taxman will be contributing
Payments made into your pension qualify for tax-relief. That means, whether they were made many years ago, or they are a recent addition, topping up your pot to help you buy the property, contributions from the taxman will be helping you to buy your business premises.
Using a pension is a very tax efficient way of owning the property:
- Your pension pays no tax on the rent it receives
- Your business can still deduct the rent your pays (remember it must be set at a market rate) as a business expense
- If you ever sell the property any gains are not subject to tax
4. No more landlords
Owning your business premises in your pension means no more ‘dead money’, paid in rent, to build someone else’s wealth.
The rent you pay will go in to your pension, building a more secure retirement for you, not your landlord.
5. Inject cash in to your business
If you already own your business premises your pension could still buy it, resulting in an injection of cash in to your business or personal bank account.
There are downsides to this, not least the sale may trigger a tax bill if you have made a profit on the property. However, it can be a useful way of realising its value and staying in control.
There’s no such thing as a risk-free investment. If anyone tells you there is, it’s usually a sign you should walk the other way. There are of course risks with owning a property in your pension.
The first of those relate to the property itself. There’s no guarantee it will rise in value and could perform worse than the investments you were holding before. There’s also the issue that you will be concentrating a large proportion of your pension in one single asset class; reducing the levels of diversification to shares, cash or bonds.
The second set of risks relate to your business. The rental income, which will, in part, grow your pension pot, is dependent on the success of your business. To put it another way, if you go bust, the rental payments will stop. You may not believe that to be a risk, in fact most business owners probably wouldn’t, but it’s something you need to think about. It can be mitigated, to a degree, by finding another tenant, however that takes time, during which the property will stand empty.
Finally, buying a property in your pension takes careful planning; at the outset, while you are trading and especially when you come to retire.
Most people, when they retire and withdraw money from their pension, take the maximum possible tax-free lump sum; 25% of their pension pot. To do this when your pension is invested mostly in property and not cash takes careful planning.
We can help
If you’re a business owner, and would like to understand more whether owning your business premises inside your pension is a sensible option, we are here to help.
Call us on 0113 262 1242 or complete our online enquiry form by clicking here.