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Buying commercial property in your pension

Date: 30 November 2023

When it comes to purchasing commercial property for a business, the most common routes are to:

  1. Purchase via the trading company
  2. Purchase via a holding company
  3. Purchase it personally and lease it to the company

Whilst these options each offer their own advantages and drawbacks, a lesser-known path is to purchase the property via your pension.

Before we go on, you can only own commercial property in a pension, not residential.

Similar to other investments, it’s not without risk. However, in the right circumstances, it can be beneficial for your pension fund and your company. The following guidance is a brief introduction to the concepts, and I would encourage you to speak to a Financial Planner with experience in this area before pursuing a transaction of this type. They’ll be able to help with ensuring it is suitable, assist you in understanding the risks involved, and guiding you away from  incurring unnecessary costs and charges.

When advising in this area, I aim to establish the answers to the following questions before a client commits to major costs:

  • Does the purchase of a commercial property in a pension make sense, given your circumstances, objectives, risk profile and investing timeframe?
  • Do the numbers stack up in terms of covering estimated purchase costs? This could involve the transfer of existing pensions, involving the pension of a spouse or business partner, additional pension contributions, borrowing or a combination of all of these.  
  • Is a pension provider likely to accept the commercial property being considered?

There are only two types of pensions that allow you to purchase commercial property, with each having distinct differences in terms of structure, management and other investment options – Self Invested Personal Pensions (SIPPs) and Small Self-Administered Schemes (SSASs). I won’t delve into the specifics here, but the choice of scheme is something that requires carefully consideration on a case-by-case basis, and bear in mind that not all SIPP providers will facilitate the purchase of commercial property.

When it comes to the types of property commonly held in pensions, they tend to be warehouses, offices, shops, and factories. However this list is not exhaustive, and I’ve come across more unusual properties in my time!

The following covers some key advantages of owning commercial property in your pension, occupied by your business:

  • The rental (which must be at market rent) is paid from your company to the pension. You can decide how to use this money; to invest in something within the pension, pay down debt (if the pension has borrowings) or pay yourself a retirement income if you are old enough. Rent doesn’t count towards your pension contribution limits, and any rent paid by the company can be deducted as a business expense against corporation tax.
  • Capital growth in the property and the rental income is free of tax whilst held within the pension wrapper.
  • Provided the company can continue to afford to pay the market rent, you have peace of mind knowing your business has a secure long-term base from which to operate and grow.
  • Typically, business owners like to feel in control of their money, having a clear understanding of where their money is invested – a property is certainly tangible.

However please consider the main risks, many of which are specific to this type of transaction:

  • You may have ‘all of your eggs in one basket’. Whilst you can let the property to a third party commonly it is let to the client’s own business. In such scenarios if the business fails there is a significant impact on the investors pension, which has lost a tenant, and it can take time to either sell the property or find a new tenant. During this interim period the pension will need to cover ongoing costs, without receiving any income.
  • Illiquidity and lack of diversification – following on from the above, all or the majority of your pension could be invested in a single property. This is problematic if cash is required pay property costs not covered within the lease, pay fees, or pay pension benefits. Furthermore, the pension may lack diversification – you could have your whole pension in just 1 investment. These risks can be partly mitigated by investing in more traditional investments, such as a portfolio of equities and bonds.
  • You need to understand that the property is owned by your pension, and not you or your business. Therefore, the rent must be paid in full and on time, regardless of the cash-flow position of the business. In a worst case / doomsday scenario, you could end up with lawyers being appointed to act for your pension, to recover rent from the business – with you effectively paying for both sides in such a dispute.
  • Cost – because of the specialist nature and complexity of this transaction the costs can be considerable. Commonly you may need to budget for SDLT (Stamp Duty Land Tax), VAT (Value Added Tax), the cost of advice, market valuations, legal costs, pension administration expenses and potentially borrowing costs.
  • Timescales – due to the technicalities & parties involved it usually take between 4 – 6 months to complete a commercial property purchase and 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 magnified if you’ve borrowed money in the pension to fund the purchase.

Please remember that apension is a long-term investment vehicle for retirement. Your eventual income will be largely determined by the size and nature of your investment fund at retirement, future interest rates and tax legislation.

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Tom Shorland APFS

Chartered Financial Planner

This financial promotion was approved by Quilter Cheviot Limited on 27 November 2023.

The value of your investments and the income from them can fall and you may not recover what you invested.