Comparison of the advantages and disadvantages of a company’s own commercial premises being bought by the company, its directors or a SSAS/SIPP
• If the company buys the property, it does not disrupt or distort the pension investment structure in any way.
• If the company owns the property, there will be no rent to pay, only interest on any debt. The interest will be tax relievable (as would be rent). By contrast, a pension scheme receives no tax relief on interest paid as it would pay no tax on any rent.
• VAT issues will be more easily handled with the company framework.
• At current very low interest rates, using corporate cash to fund a deposit on the property purchase will produce a better investment return in terms of rent saved compared with interest foregone.
• The property would be available to the company as future collateral for loans.
• Borrowing limits may be higher for the company as a percentage of property value than for a pension scheme.
• Keeping the property in the company removes the liquidity problems the pension scheme might face, e.g. on an early retirement, resignation or death of a director.
• There is no inheritance tax (IHT) downside, as the property will normally qualify for 100% business assets relief via the directors’ shareholdings, provided it is used only for the purposes of the business.
• Although the company will be liable to corporation tax on any capital gains arising from the sale of the property, it has the benefit of indexation allowance up to 31 December 2017.
• In any event, tax on any capital gains would probably be deferred by claiming rollover relief on investment in a replacement property.
• If circumstances change, the property could be sold to a SSAS (or a SIPP) at a later stage.
• There will need to be substantial cash (or non-property related borrowing facilities) in the company to put towards the property purchase. This will drain liquidity from business – and liquidity has become a valuable commodity. According to Funding Options, the deposit amount for a commercial mortgage is usually between 25% and 40%. The figure will depend on a number of factors, including the level of risk the business poses to the lender. Owner-occupied commercial mortgages tend to have a 70% to 80% loan-to-value (LTV) ratio, which refers to the size of the mortgage in relation to the value of the commercial property the company wants to buy. The LTV for a commercial investment mortgage rarely exceeds 75%, unless the business is going to provide extra security. When it comes to pricing an application, the lender will consider the loan size, LTV, the company’s credit history and its business’ financials, as well as a range of other factors. When it comes to owner-occupied mortgages, rates can be anywhere from around 2.25% to 18%. Lenders will also be extremely reluctant to lend without some repayment of capital being made during the term.
• As the property owner will be the company, the property will be available to creditors if the company fails. In a pension scheme it would generally be protected.
• There are potentially two layers of tax on gains: once in the company and once on the shareholders, albeit the shareholders may have the benefit of entrepreneurs’ relief on cumulative lifetime gains of up to £1m. However, this relief may be needed elsewhere.
• By purchasing the property, the company would be denying the pension scheme a high yielding investment, on which no tax is withheld from the income.
Purchase by directors
• The property can be retained if the company is sold in the future. In this way it could be used to supplement retirement income.
• Property can usually provide a high income, if required. For the types of small secondary and tertiary property that might be involved in a small company purchase, yields could be higher still.
• Drawing rent is a national insurance (NIC) efficient means of extracting income from the company, although a full commercial rent would remove any entitlement to entrepreneurs’ relief.
• There is no need to charge as much as the market rate for rent, as there would be with a pension purchase.
• If the property were held personally there would only be one layer of capital gains tax (CGT). The rate would be 18% to the extent that capital gains fall within the director’s basic rate income tax band and 28% on any excess. However, entrepreneurs’ relief could be available if the sale of the property is an associated disposal (i.e. broadly at the same time as the disposal of the business). This could reduce the effective tax rate to 10%, but entitlement to entrepreneurs’ relief would be scaled back if any rent had been charged to the business. At the level of a full commercial rent, there would be no entrepreneurs’ relief available. In any event the maximum amount of cumulative lifetime gains eligible for relief is £1m. Rollover relief would also be available.
• For income tax purposes, the interest on the loans could be fully offset against the rent received.
• Borrowing limits might be higher for directors as a percentage of property value than for a pension scheme. They may be able to offer additional collateral, e.g. residential property.
• The directors may be at risk as a result of the personal borrowing to finance the purchase.
• If interest costs rise above the rent, the directors may have to increase rents or pay the excess out of taxed income (although losses can be carried forward).
• There could be difficulties on the death of one of the joint owning directors or if one wants to sell up for any reason.
• Only a director who has a controlling interest in the company will be entitled to IHT business assets relief on a property which has been owned for at least two years, and then at 50%, not 100%. 50/50 ownership would result in no IHT relief.
• A single property may not be an appropriate investment for the directors.
• The directors may become involved personally in VAT if the property is subject to VAT.
Purchase by a SSAS/SIPP
• If the property is sold by the pension fund to provide the director with retirement benefits, there is no CGT liability.
• The capital growth on the property does not increase the value of the director’s shares for CGT and IHT purposes, nor does it reduce the director’s cumulative lifetime limit for entrepreneurs’ relief.
• If there are younger directors in the SSAS or a group SIPP, it may be possible to retain the property within the SSAS/SIPP when older directors chose to draw benefits. This will depend on the retiring director’s benefits being met from other scheme assets.
• The rent paid by the company to the SSAS/SIPP reduces its corporation tax liability. The rental income is received tax-free by the SSAS/SIPP.
• The property is generally protected from creditors, provided there has been no attempt to defraud the creditors.
• There will usually be capital available in the pension scheme to fund part of a purchase. This may not be available elsewhere.
• The property can potentially remain in the pension into retirement and beyond. Beneficiary’s drawdown offers the possibility to leave a property untouched in the pension arrangement after the member’s death.
• Where the pension fund is purchasing the property, and this has been built up out of pension contributions, there is effectively tax relief on the purchase of the property.
• The death, ill-health, leaving service or early retirement of a scheme member could force the scheme trustees to sell the property or obtain a loan to provide the benefits. This sale or additional borrowing could be at an inopportune time.
• Forced sale difficulties could arise where the directors of the company fall out and the company’s premises are owned by their pension arrangement(s).
• If the property represents the main asset of the SSAS/SIPP it would leave its investment holdings poorly diversified.
• The maximum the scheme can borrow is 50% of net assets.
• The £40,000 Annual Allowance limits the scope for pumping large contributions into a SSAS/SSIP to help finance the purchase of property, although carry forward may offer some help. Often the “solution” to financing property purchase is the transfer of previous pensions benefits, e.g. from personal pensions. This is clearly a route which needs to be treated with appropriate care.
• The property cannot be used as collateral for future loans to the company.
• The company would have to pay a full open market rent to the SSAS/SIPP at all times. Failure to do so would result in unauthorised payment/scheme sanction charges.
• The property will need to be valued, e.g. when statements of benefits are given, benefits are drawn or loans are considered. On each such occasion this will carry a cost.
• If the SSAS/SIPP trustees have borrowed to purchase the property, interest payable on the loan will not qualify for tax relief as the scheme does not pay tax.
• The scheme will have to register for VAT if the property is not VAT exempt.
• The scheme can purchase the property from the company or scheme member(s), but any such purchase must be on arm’s length terms if unauthorised payment/scheme sanction charges are to be avoided