One unavoidable cost for businesses that require a premises such as an office space or factory, is the cost of renting or owning this space. Something quite often overlooked is the opportunity for a business owner (with careful planning) to reroute this significant cost into a long-term pension saving.
Even successful and well-established businesses often rent their premises from a third party, meaning hard-earned revenue builds the wealth of the landlord, rather than owners, investors or employees. We have all heard the phrase, ‘renting is dead money’.
Naturally, paying rent or ‘dead money’ to line someone else’s pocket is unappealing to many – one hugely effective piece of planning we work on with clients is purchasing the business premises within the owners’/directors’ pension fund – thus meaning that ‘dead money’ becomes a tax-efficient investment for the future rather than a cost leakage to a third party! To put it simply, the individual would be ‘lining their own pocket’ for the future, rather than an unknown landlord’s pocket.
Case study
David owns his own business providing social media marketing services. The business has grown rapidly, now employing a team of seven people. The business currently rents a modern office paying approximately £3,500 per month in rent.
Prior to setting up his own marketing business, David has been employed in multiple roles and over this period accumulated several pensions totalling £500,000. However, he hasn’t contributed to any of the pensions over the last three years since setting up his own business.
With plans for growing the headcount requiring more space, and David conscious he is paying a large amount of money each year to his landlord for the office, he would like to explore options.
So, he has found an alternative office space that would suit the business to be settled in long term and is available to buy for £550,000, which appears to be great value. However, the business doesn’t have £550,000 of cash with which to purchase the office space without affecting cash flow and possibly hindering its ambitious plans for growth.
As David already has pension savings with a value of circa £500,000, we would be able to explore this option to fund his pension and purchase the commercial property (office space) using his pension savings. The solution for David would be as follows:
- consolidate David’s existing personal pensions into a full self-invested personal pension (SIPP)
- make a pension contribution for David to his new SIPP, using his annual allowance for the 2024/25 tax year and his carry forward allowances for the earliest two of the three years where he missed making pension contributions, totalling £140,000 – David’s total SIPP value would then be approximately £640,000
- use David’s new SIPP to purchase the commercial property office space at circa £550,000
- the business would then pay the rent for the office space to David’s SIPP, on a commercial basis
- the SIPP’s value would then continue to grow with the monthly/annual rent, David’s pension contributions and any additional investment growth
What are the benefits?
So why is the above scenario (or similar ones) such clever planning and what do you gain?
- Your pension becomes your landlord, meaning the rent that was being paid away will now be going into your pension and boosting your retirement savings.
- The commercial rate of rent being paid will still be treated as a deductible business expense, thus reducing your corporation tax bill, especially relevant given corporation tax rates have increased!
- Pension vehicles are tax-free growth environments, which means that within the pension scheme there is no income tax payable on the rental payment.
- Should there be any gain on the value of the commercial property when sold, there will not be any capital gains tax due, as may be applicable if owned personally or via the business.
- Pension vehicles are also generally regarded as outside of your estate on death. So, if the commercial property is held within the pension, it could lead to an inheritance tax saving.
- If your business was ever to run into financial difficulties further down the line, the commercial property held within the pension scheme would not be accessible by creditors – this should not be a driver for purchasing the property within the pension scheme and there are certain circumstances where this can be clawed back.
It is important to remember that purchasing a commercial property within your pension is not appropriate in every circumstance and there are a number of things to bear in mind, such as:
- the rent paid by your business to the pension must be at a commercial rate, you cannot use the commercial property within a pension as a means to pay low rates of rent
- there is a minimum age at which you can access funds from your pension, currently age 55, rising to age 57 in April 2028, so the monies within the pension cannot be accessed any earlier than this
- pension schemes face high tax charges should they purchase residential property, so it is important that any premises purchased are officially classed as commercial property
- purchasing commercial property within a pension can become complex, so it is beneficial to receive professional advice before proceeding with a purchase
Although there are circumstances when this may not be advisable or feasible, should you and your business have the means to do so, then purchasing your business premises is a great way to reduce your corporation tax bill, stop sending hard-earned revenue to third-party landlords, and in turn grow your pension pot for retirement.
This article was written by Wealth Management Consultant, Henry Allen.
Content correct at time of writing (September 2024).
This article has been produced for information purposes only. It is not intended to be an invitation to buy or act upon the comments made. All investment decisions should be taken with advice, given appropriate knowledge of the investor’s circumstances and one must satisfy certain investor criteria before being considered eligible to invest. Pension rules may change. Any forward-looking statements and forecasted returns represent the current views of Mattioli Woods Limited and may be subject to change. Your capital may be at risk and past performance is not a guide to future returns. Mattioli Woods Limited is authorised and regulated by the Financial Conduct Authority.
