It is often forgotten that pension funds can offer an alternative and tax efficient solution to buying commercial property.
A Self-Invested Personal Pension (SIPP) or Small Self-Administered Scheme (SSAS) offer flexible arrangements that permit investment in commercial property. A SIPP is an arrangement established by an individual, whereas a SSAS is established by the employing company. It is possible for the schemes to borrow money to part fund the acquisition of the commercial property, although there are restrictions on the amount that can be borrowed by reference to the overall scheme value. The pension scheme does need to act in an independent manner – even if the property is to be let to a connected business. These aspects of any arrangement would be dealt with by an FCA registered Financial Advisor.
Our experience is that there is a lack of awareness of the
Three individuals are each a member of an LLP, carrying out design work for the leisure sector. The business is profitable, and each member receives £200,000 profit per annum. The business has grown and they wish to move to a new design studio. The business and partners personally have cash reserves in order to fund the acquisition of the property.
The straightforward position would be for the LLP to acquire the property. In this instance, no immediate tax relief would be available and the cost incurred in buying the property would only generate tax relief on an eventual sale of the property.
As an alternative, each partner could establish a SIPP, and make a contribution into their pension scheme. This would, subject to certain annual limits, qualify for immediate income tax relief. The SIPPs could then establish a property fund joint venture to acquire the property, and lease it to the LLP. The rent paid by the business would also qualify for tax relief, and, of course, the rental income in the pensions schemes would not be taxable. On an eventual sale of the property, no Capital Gains Tax ("CGT") applies in certain cases when an asset is sold for more than it was originally purchased. The taxable gain (profit) may be triggered following the transfer of an asset, although commonly this would follow a sale. A number of tax reliefs are available to exempt or reduce the tax that may apply. Basic tax planning may... More would arise, again due to the tax exempt status of the pension schemes. Considering a £300,000 property let to the LLP for 10 years at a rent of 10% for ease, the result could be a tax saving of up to £270,000 in cash terms at today’s higher rate.
The position could potentially be further enhanced if the pension schemes also borrowed funds from a bank to part fund the acquisition of the property. Again, the LLP would pay rent, which would qualify for tax relief, and the property fund would use these rents to pay the interest and capital on the loan. Over time, the business has effectively funded the acquisition of the business property through the payment of tax deductible rent. This must be a better position for the business and the partners than paying rent to a third party.
The analysis above could apply equally to companies and their shareholders and indeed individuals looking to acquire commercial properties to let to unconnected third parties.
If you would like further advice in respect of any of the tax matters discussed here please do not hesitate to contact us.
The Tax Advisory Partnership is a member firm of the Chartered Institute of Taxation (CIOT). We are not Financial Advisors and are not regulated by the Financial Conduct Authority (FCA). Where appropriate we will work with your Independent Financial Advisor or we can introduce you to an IFA who can take care of the FCA aspects of any advice you require. However, our focus is on ensuring that any investment strategy you may select meets with your overall financial and taxation objectives.