In the final article of this finance series, Martin Cook, Director at Exel Finance, discusses the tax advantages of purchasing your own commercial property.
In the last article in ATF Professional, I discussed the different ways you could set up the purchase of your commercial property. You could buy it in your personal name, buy it through your trading company or set up a separate limited company or what we call a special purpose vehicle (SPV) to purchase it. I also discussed some of the benefits and tax advantages of each.
I promised that in this, the final article of this series, I would discuss one other tax advantageous vehicle for holding and owning your commercial property.
It was Benjamin Franklin who said there were only two things certain in life: death and taxes. However banal that might sound, it is true. We all have to pay tax; most of us resent it and seek to avoid paying any more than we have to. Please note that I said “avoid”, not “evade”. Whilst avoiding paying tax is perfectly legal, evading tax is not and could result in spending time at her majesty’s pleasure. So who would not want to learn how to actually get a contribution towards anything from the taxman?
The question in the title of this article was meant to catch your attention – I hope it has because it is perfectly true. You can arrange your affairs in order for the taxman to contribute to the acquisition cost of your commercial property. How? By purchasing your commercial property through your pension.
There are two different types of pension which will allow you to buy commercial property; a Self-Invested Personal Pension (SIPP) or a Small Self-Administered Scheme (SSAS). You may currently have a personal pension which is invested in the pension provider’s own managed funds, for example. A personal pension of this type will not permit the purchase of your own commercial property, but you can arrange to transfer the value of that personal pension into a SIPP or a SSAS.
So how can HMRC contribute to the purchase of your commercial property? Let’s consider an example:
The example I will use in the interest of simplicity is that of a SIPP or the self-invested version of a personal pension. You could equally set up a SSAS or a Small Self-Administered Scheme, which is the self-invested version of a company pension scheme. Whilst the tax treatment of the contributions is different, the tax advantages are the same.
So let’s assume that you set up a SIPP and make a personal contribution of, say, £20,000, your contribution would receive tax relief of £5,000, meaning £25,000 is paid into your pension. Let’s also assume that over time your pension fund grows to £300,000 with both regular personal contributions and also by transferring any existing pension funds into your SIPP. You could now encash whatever investments are held in your SIPP and use the cash to purchase a commercial property. Please note you cannot purchase residential property through your pension.
But what if the property you want to purchase is £400,000 and you only have £300,000 in your pension fund? This isn’t a problem because your pension fund can borrow up to 50% of its own value. Therefore, you could potentially borrow £150,000 on standard commercial terms in order to be able to afford the property.
But the tax advantages are not restricted to personal contributions. You, as a tenant, will now be paying rent to your own SIPP, and all rental income received into your SIPP is free of both income and capital gains tax. Therefore, the cash within your pension will grow much quicker because of this very favourable tax treatment. This will enable you to pay down any commercial mortgage very quickly or alternatively allow you to accumulate enough cash to purchase additional or bigger commercial premises.
It may be that you or your business already own your premises, and you already have a SIPP or a SSAS with a significant fund value. In that case, you could consider selling your property to your pension. This would not only allow you to benefit from the tax advantageous treatment of your property but also give your business a valuable cash injection.
On completion of the transaction, cash, previously held in your pension, would now sit in your business, and the property would be owned by your pension. The transaction must be on commercial terms and for a fair market price, which is generally decided after an independent valuation. Please bear in mind that if you or your business has made a profit on the property, the sale to your pension could trigger a tax charge. You will also have fees to pay, including stamp duty, and you won’t be able to take any income from your pension until you are 55.
There are many reasons to own your business premises through your pension. But, it is still first and foremost an investment, which you hope will grow over time and provide you with an income in retirement.
If you were to own your business premises personally or through a limited company, any profit when you sell it would potentially be taxable. However, owning the property through your pension means that no tax is payable if you ever sell it.
Before you consider taking any action, it is essential that you seek the guidance of your professional advisers. But hopefully, this article has opened your eyes to additional opportunities and can be a topic of discussion when you next meet with your accountant or pension adviser.
For further advice or information, please contact Martin at mc@exelfinance.co.uk or call him on 0161 327 1837.
Martin’s previous articles:
