Why proposed IHT changes won't stop this commercial property strategy

Changes to pensions are fast approaching, but for business owners using their pension to hold commercial property, the reasons for doing so remain compelling.

From April 2027, most unused pension funds and pension death benefits will be brought into the scope of inheritance tax (IHT). It's a significant change, but one that doesn’t remove the underlying tax advantages of holding commercial property in a registered pension scheme.

A Self-Invested Personal Pension (SIPP) or Small Self-Administered Scheme (SSAS) gives individuals and business owners a strong degree of control over their pension investments, offering a tax-efficient way to buy commercial property. The property can then be leased to the member’s business or to a third-party tenant. Rental income received and investment gains made within the scheme are generally exempt from income tax and capital gains tax and, for a double tax benefit, where the investor’s trading company is tenant, the rent will generally be an allowable business expense for corporation tax purposes.

Investors don't necessarily need to hold the full purchase price in their pension before they start, with options to borrow up to 50% of the net value of the fund being available, subject to applicable rules.

Market commentary indicates year-on-year growth in the number of SIPP and SSAS transactions taking place and at Aberdein Considine LLP we are seeing significantly more interest in this type of transaction, both from business owners and from individual investors. Part of the reason for this is that the appeal of this method of investment goes beyond tax reliefs.

While previously many people presumed commercial property could only be bought personally or through a limited company, there’s now a growing awareness that using a SIPP or SSAS allows for diversification and growth of wealth outside of an individual’s core trading business.

If a business sale is on the horizon, separating the trading business from the property can potentially leave the owner with two assets – the value realised from selling the trading business and a retained investment property, along with the future rental income it generates within the pension. It can also be equally attractive for businesses that currently lease their premises from a third-party landlord. Acquiring a suitable property through the owner’s pension allows rent to be paid into a pension structure, rather than to an external investor, benefiting the owner’s long-term retirement planning, while freeing up capital within the business that can be used to support expansion, investment or debt-reduction.

Whether this type of structure is, or remains, the best option for an individual in light of forthcoming IHT changes will depend on their objectives, their plans for their business and how they intend to use or pass on their pension assets.

Having first taken specialist wealth and tax advice to determine whether this route is right for the individual or business, those looking to pursue this type of investment should seek advice from a commercial real estate solicitor with experience in SIPP and SSAS transactions who can help ensure that the acquisition is structured appropriately and runs smoothly through to completion.

The sooner advice is sought, the more options are left on the table, particularly with April 2027’s proposed IHT changes hoving into view.