If you’re considering investing your pension into property, it’s important to know what’s what.
Which Pensions can be used for Property Purchase?
Self-administered pension schemes can be used for the purchase of property, of which there are two types:
- SIPPs (self-administered pension schemes)- used by individuals
- SSASs (small self-administered schemes)- used by companies
If the pension fund does not have enough money to buy the property outright, it can borrow money to make the purchase of up to 50% of the value of the property.
Commercial NOT Residential
It can be very tax efficient to buy commercial property through a pension fund, for reasons we will discuss in a moment. The types of buildings that qualify as commercial property are things like warehouses, offices, retail units, etc.
It’s important to note here that buy-to-let properties are classed as residential, not commercial, even if you aren’t using them for your own residential use.
You can buy residential property with your pension fund, but you will face a large tax bill from HMRC, which in most cases, makes it financially unviable. It cannot be brought into a pension scheme in a tax-efficient way.
Why is it Tax Efficient?
When you use your pension fund to purchase commercial property, the property in question is now owned by your pension.
Let’s imagine a scenario in which you are a business owner who uses your pension scheme to purchase the premises of your business to take advantage of tax breaks. Your business then takes up a commercial lease with your pension, paying rental payments based on standard market rates. When your business makes these rental payments, the money goes straight into your pension rather than a landlord. This rental income received from the pension fund in regard to the property is exempt from income tax.
If you then sell this property in the future, any gains made on the disposal of the property by the pension scheme are free from capital gains tax.
As well as these significant tax benefits, investing your pension in commercial property means a regular income into your pension pot. It also means you own a physical asset which won’t disappear if the market crashes and shouldn’t fluctuate in value too much.
However, there is no guarantee that the property you invest in will appreciate in value. If it does depreciate and the property makes a loss at the point of sale, your pension is also making a loss. Additionally, you should bear in mind that even if it does make a profit, you cannot access pension funds until age 55, so this money will remain locked away in your pension until then.
If you are considering investing your pension into property, you should contact a regulated and qualified financial adviser before making any big decisions.