PensionsApr 10 2019

Commercial property can save your pension

  • Describe how commercial property can be used in a pension
  • List when residential property can be used
  • Describe what happens with tangible moveable property
  • Describe how commercial property can be used in a pension
  • List when residential property can be used
  • Describe what happens with tangible moveable property
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Commercial property can save your pension
  • The person occupying the property is not the member or connected to them, is not connected to the employer (being an employee in itself doesn’t create a connection), and is required as a condition of employment to occupy the premises; or
  • The person occupying is not the member or connected and the residential element is used in connection with the business premises held in the scheme.

Looking at a pub, provided a live-in landlord is not the member or connected to them, or connected to their employer, and is required to live in the pub, the property should be acceptable from a HMRC perspective.  

Shops with flats above are broadly the same, though care is needed in both cases.

Consideration also needs to be given to the likelihood that no employee will occupy the premises in the future.

The property will continue to be “suitable for use as a dwelling” but the permitted “job-related” exemption from treatment as residential is no longer met when occupation ceases, potentially creating significant tax charges.

Other specific circumstances where HMRC has decided that residential property is okay include:

  • prisons; 
  • hospitals; 
  • homes or institutions providing residential accommodation for the care of children, the elderly, the disabled or those with mental health issues or drug or alcohol dependency issues;
  • halls of residence for students.

Care is needed even with these, particularly when considering those last two options.  

HMRC has specific expectations for properties of these types which are beyond the scope of this article.

However, I have seen several investments linked to properties of this type marketed as “Sipp and Ssas-compliant” where it appears those promoting the investments are not aware of HMRC’s expectations – buyer beware.

Using borrowing to buy a property

Pre A-Day, Sipps and Ssases could only borrow funds to purchase commercial property.

That restriction no longer exists, but borrowing is still primarily used for the purchase of commercial property.

It is a valuable option because it potentially allows funds in the scheme to be used for other investments.

The maximum limit on borrowing is 50 per cent of the net value of the pension immediately before the borrowing takes place.  

This sounds a simple calculation but the treatment of existing borrowing has caused confusion over the years.

A quick example may help:

Assets
Cash and non-property investments £100,000
Existing commercial property £200,000
Existing borrowing   £50,000
Net value of pension£250,000

This scheme has a net value of £250,000, which might make it appear the maximum amount of borrowing allowed at this point is £125,000.  

However, because the scheme already has outstanding borrowing of £50,000, the maximum amount of new borrowing is reduced to £75,000.

Key points to understand are that: 

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