Month: July 2016

Using Your Pension to Buy Business Premises

Using Your Pension to Buy Business Premises

You might have heard that you can save tax if you buy your business premises using your pension. This topic has received increased attention in light of the recent pension reform and the Government’s tapering of annual allowance for high earners. If you are a self-employed professional, work in a partnership or have a company, using your pension to buy your premises can bring numerous benefits, which are not limited to tax savings.

How It Works

Your pension plan, which is legally a different entity from you and from your business, is the owner of your business premises, such as your office or shop. Your business is the tenant and pays rent into your pension.

Benefits

  • The rent is of course a cost for your business, lowering its taxable income. At the same time, a pension plan can receive rental income tax-free. Once paid into your pension, it can be reinvested for further tax-free growth. These tax savings can compound over the years.
  • Besides no tax on rental income, there is no Capital Gains Tax within your pension if you sell the property later.
  • The rent is not considered a pension contribution; therefore it does not use your annual pension contribution allowance and is an effective way to grow your pension pot faster if annual allowance is a problem (particularly for high earners).
  • If you have registered for protection against the Lifetime Allowance (LTA) decrease, or planning to do so, one of the conditions is to stop making further contributions. Because rental income is not considered a pension contribution, this restriction does not apply.
  • There is of course the significant benefit of being your own landlord, having complete control over the premises and avoiding the common pitfalls of landlord-tenant relationships.
  • At the same time, when your property is owned by your pension rather than your company, it is protected against creditors in case your business gets in trouble.
  • If you or your business already own the property, transferring (i.e. selling) it to your pension can free up cash, which can then be used to finance further business activities or personal needs, or even to make additional contributions into the pension plan to attract further tax relief.

Joint Purchases and Partnerships

Your own pension does not need to be the sole owner of the property. If you work in a partnership, like a firm of solicitors or consultants, individual partners can use their pension plans to buy the premises together. Your pension can also buy property in conjunction with yourself or your company.

Types of Property Which Qualify

You can use a pension plan to buy various kinds of commercial property, including office space, retail shops, hotels, industrial premises and even farmland. On the contrary, residential property does not qualify – you can’t buy your house or holiday home via your pension (not even if you work from home).

Risks, Costs and Limitations

Buying property with your pension is a big decision which must not be taken without careful consideration of all risks (commercial property prices are highly sensitive to the state of the economy) and costs (such as stamp duty, valuation, administration and legal fees). You must also understand the tax implications and compliance issues for all parties – yourself, your business and your pension plan.

Not all pension schemes can hold property. In some cases you may need to transfer your pension to a more modern and flexible scheme. Besides universal legal requirements, individual pension providers often have their own rules and restrictions in place. For instance, they may insist that you use their own solicitor or mortgage provider. Make sure to check all these rules (and all charges) before making any decision.

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