In short, yes you can. You cannot buy residential property with your pension, not even a building or site that has been granted planning permission for a residential property. You can however buy commercial property. This might be a small office that your company works from or a shop or factory.
There are several benefits to doing this:
- The rental income that your company pays will go into your pension fund where it is free from income tax. You will have to pay some income tax on that money when you eventually draw your pension but in retirement that might be at a lower rate than when you are working.
- You can co-purchase with a spouse’s pension fund which allows you to build up a decent pension fund in both of your names. This is great tax planning for when you retire as you can then use both of your income tax allowances in full.
- The growth in the value of the property is also free from capital gains tax in the fund.
- You can borrow up to 50% of the current value of your pension to help with the purchase and the rental income can help pay down this loan over time.
- You can make tax-free contributions to your pension fund from company cash (and to a spouse’s pension if they are involved in the business to build the pension fund faster.)
There are of course several negatives which need to be understood:
- Under current government plans, pensions will stop being free from inheritance tax on death from 6th April 2027. This will remove a significant current tax advantage.
- There are limits to how much you can contribute to a pension to build the fund up ready for purchase. The annual limit is currently £60,000 gross per year (you can also go back three years if you have sufficient income) or your pensionable income, whichever is lower. High earners have lower limits than this.
- The pension fund is buying the property and so, if you have already owned it for a period of time, you will have to pay capital gains tax on the gain. Capital gains tax is currently at historically low rates so this is not necessarily a negative but it does mean you have to find the cash to pay the tax.
- You will need a Self-Invested Personal Pension with the ability to buy commercial property, most ‘Sipps’ are actually simple pensions without this ability. The additional Sipp fees for buying commercial property tend to be flat fee charges and so not cost effective for small property purchases.
- If you are buying a property that is liable to Value Added Tax, you will need to pay the VAT bill from the pension fund and reclaim it from the taxman later if you believe you don’t owe it. Your pension company will handle this for you. The rules around VAT are complex and you will need advice.
- Ultimately you are building a fund which at some point you will want to draw an income from. 25% of this fund should be tax-free whether it is taken as a single payment or a series of payments (with a cap for larger funds). The rest is taxed as income and so you need to think ahead and imagine what your finances look like in retirement.
- The biggest problems are often the most practical.
- How will you exit the property when you retire? Your retirement may be delayed whilst a buyer is found for the property.
- Is the property integral to the business? Can a buyer for the business also be a buyer for the property? Otherwise timing your retirement might need a company sale and a property sale.
- The pension fund can only own the building and not any contents (anything that can be picked up and moved) and so your company or a future tenant will need to buy everything else. The rules here are complex and unclear, so it is better to assume that the tenant will need to buy everything (even fixed items like solar panel don’t seem to be clear).
We have clients currently with pensions containing a wide range of assets. We charge on a flat fee basis and so have no bias towards or away from owning a property in your pension. Most advisers charge a percentage of an invested pension funds and therefore will advise against a property purchase in a pension, as they don’t get paid.
We look after these clients from our office in Hook, Hampshire and across the UK.