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With the advent of auto-enrolment, pensions have never been more in the spotlight from a family business perspective. Here John Moore of Blackstone Moregate highlights some of the advantages and disadvantages of buying a commercial property or land with a personal pension.


 

There are now so many different ways to invest in property, whether it’s buying directly, through collective investment funds or even crowdfunding, it’s becoming easier and easier to invest in commercial property.

Another increasingly popular method of investing in property is by using existing pension monies. There are two main methods of using your own pension to purchase property:

1 Purchase commercial property or land directly via a pension

What are the advantages?

  • You can utilise funds that you may not have considered previously could purchase property.
  • If the property grows in value within a pension it is free of Capital Gains Tax, which is becoming more and more significant in London.
  • You can raise a mortgage up to 50% on top of the current value. For example, a £500,000 pension could, therefore, purchase land or property valued at £750,000.
  • The property will be bought into a trust and, therefore, it is creditor protected If a company buys its own commercial premises, the rent paid to the pension reduces the corporation tax it pays.
  • Rental income to the pension is received free of income tax.
  • Any pension contributions paid by the company to the pension reduces the company’s corporation tax.
  • Up to 11 people can utilise their pension monies within a project

What are the disadvantages?

  • The death, failing health or retirement of a member may require the property to be sold to fund these situations.
  • The company renting the premises will have to pay a full open market rates at all times, even if your company rents the property.
  • When statements of benefits are given, benefits are drawn or loans considered, a property value is required, which will carry a cost.

2 Loan 50% from your own pension to a property business (the company would NOT be restricted to purchasing only commercial property/land)

If you are the director of a limited company, you are able to lend up to 50% from your own pension (or business partner’s/spouse’s) to the business as a loan for no more than 5 years, which could be used towards property investment.

What are the advantages?

  • For example, a £500,000 pension could lend up to £250,000 to a limited business to help with bridging finance for a BTL/HMO/JV project.
  • You have utilised funds that you may not have considered to purchase property.
  • Any interest from the loan is paid to the directors’ own pension, rather than the bank or third party.
  • Any pension contributions paid by the company to the pension reduces the company’s corporation tax.
  • As long as the 50% maximum borrowing rule is followed, the pension can be used as a revolving facility with multiple loans, time and again. Up to 11 people can utilise their pension monies within a project

What are the disadvantages?

  • A minimum pension pot of £120,000 is required between all of those involved.
  • As the maximum loan is for 5 years, loan repayments can be high (although these are paid back to the director’s own pension anyway).
  • The money should ideally be used for short term, turn-around projects where possible.
  • Tax charges can be applied to the pension if loan repayments are not repaid.

It is important to note these investments do not come without risk. With option 2, if the company was to go out of business/become insolvent the loan might not be repaid and the pension pot could suffer as a result. There are also other important aspects to consider.

Please note: this article should not be deemed as financial advice and you should always seek professional, independent assistance.

John Moore is a Financial Adviser for Blackstone Moregate. For more information, please contact him on: 020 3376 1444, or via email: john.moore@blackstonemoregate.com.

Blackstone Moregate Limited is authorised and regulated by the Financial Conduct Authority: FCA Registration No: 459051