If you want to buy a commercial property for your business the most common routes are either to purchase it via the company, or to buy it personally and lease it to the business. Whilst these traditional routes are perfectly viable, and each offer their own advantages and risks, a lesser known option is to purchase the property using your pension. Though many people are surprised when I tell them this is possible it’s a well-trodden path and an area I’ve worked in for the last 8 years.
As with any investment it’s not without risk and property values, like any investment, can fall as well as rise. But, in the right circumstances, it can work well. This article is intended as a brief introduction to the concepts and I would encourage you to take advice before pursuing a transaction of this type to ensure it is suitable, you understand the risks involved, and you don’t incur unnecessary costs.
When advising on this type of transaction, I ensure I discuss the following 3 key questions before an investor commits to any major costs;
- Does the purchase of a commercial property in a pension make sense, given an investors’ circumstances, objectives and risk profile?
- Do the numbers stack up in terms of funding the purchase, whether this involves the transfer of an investors’ existing pensions, additional contributions, borrowing or a combination of these?
- Is the pension provider likely to accept the commercial property in question based upon the information initially provided?
There are only two types of pensions that allow an investor to purchase commercial property and these are distinctly different in terms of structure, management and other investment options. In the interests of keeping this concise, I won’t go into the specifics here, but the choice of scheme is something that bears carefully consideration on a case by case basis.
As long as a property is commercial (rather than residential) it’s theoretically possible to hold most types in a pension. Most commonly these tend to be warehouses, offices, shops, and factories however I’ve dealt with a number of more unusual properties in my time.
The key advantages of buying a commercial property for your business using your pension are:
- The rental (which must be at market level) is paid from your business to the pension. You can then choose to use this rental to invest in something else within the pension, pay down debt (if the pension borrowed for the purchase) or pay your retirement benefits if you are old enough. The rental doesn’t count towards your pension contribution limits, and any rental paid by the company can be deducted as a business expense.
- Any capital growth in the property and the rental income is free of tax whilst held within the pension wrapper.
- As long as the business can afford to pay the market rent set out in the lease, you have the peace of mind of knowing the business has a secure long term base from which to operate and grow.
- Commonly business owners like to feel in control of their money and have a clear understanding of where their money is invested.
Clearly there are major risks and downsides to consider, many of which are specific to this type of transaction:
- Having all of your eggs in one basket – it’s possible to let the pension property to a third party but commonly its let to the investors own business. In this case if the business fails there is a significant impact on the investors pension, which has lost a tenant, and it takes time to either sell the property or find a new tenant.
- You have to remember that the property is owned by your pension – which means that the rental must be paid in full and on time, regardless of the cash-flow position of the business. In a worst case scenario this could lead to lawyers being appointed to act for your pension to recover unpaid rent from the business – and you’ll effectively be paying for both sides in the dispute.
- Cost – because of the specialist nature and complexity this is an expensive transaction. Commonly an investor will pay for advice, market valuations, legal costs, pension administration expenses and potentially borrowing costs.
- Illiquidity and lack of diversification – following the transaction it is not uncommon for most if not all of your pension to be invested in a single property. This can be a real problem if cash is required within the pension, to pay property costs not covered in the lease or to pay fees or pension benefits. Furthermore, the pension will lack diversity – meaning it will be adversely affected if the commercial property market falls. Both of these are specific risks associated with this type of investment that can be largely mitigated by investing in more traditional pension investments such as a portfolio of equities and bonds.
- Timescales – even if you’ve not purchased a commercial property before you’ve likely bought or sold a home, so you won’t be surprised to learn that, due to the various technicalities & parties involved it usually take between 4 – 6 months to complete a commercial property purchase. Occasionally it can take longer due to factors beyond your control.
- Investment & income risk – like most investments there is a risk that the value of the property could fall and the income generated could fall or even stop. These risks are enhanced if you’ve borrowed money in the pension to fund the purchase
A pension is a long term investment. Your eventual income may depend on the size of the investment fund at retirement, future interest rates and tax legislation.
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Tom.Shorland@aspirellp.co.uk
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