Business owners have had a tough time of it of late.

The coronavirus pandemic affected employers and employees across multiple sectors. Since lockdowns lifted, flexible and remote working have presented new challenges.

Most recently, the cost of living crisis and rising energy bills have dominated news headlines.

In an uncertain economic climate, making long-term business plans can be difficult. Whether you or a business-owner client are looking to buy new business premises or expand a current set-up, the purchase might require additional funds.

Extending a business overdraft or applying for a bank loan might be daunting while stumping up the personal cash is even more of a risk. But if money is needed fast, could borrowing from a pension be the answer?

Keep reading to find out.

Borrowing from a pension is tax-efficient but the rules can be complicated

A self-invested personal pension (SIPP) or a small self-administered scheme (SSAS) can be used to help buy the business space a company needs. Different rules apply to each though, so careful consideration will be needed.

Using a SIPP

Up to 50% of a SIPP’s value can be borrowed to help buy business property. The property is then leased back to the business with rent payable on commercial terms back into the pension. This rent is tax-deductible as a business expense.

This method is also tax-efficient as any increase to the value of the property is owned by the pension and falls outside of Capital Gains Tax (CGT) liability.

The property doesn’t need to be connected to a specific business but its primary use must be commercial.

A SIPP can’t be used to buy or invest in residential property, nor can one be used to make loans to a connected party. Doing so could result in an unauthorised payment charge from HMRC.

Loans can be made through a SSAS though.

Using a SSAS

As with a SIPP, a SSAS can be used to buy or invest in business property (or any other commercial premises). Up to 50% of a SSAS’s value can be borrowed and the rules around rent are the same as those applicable to a SIPP.

Because a SSAS is an occupational pension, it can also be used to lend money to a sponsoring employer.

There are five strict HMRC tests that a loan must pass. These are:

1. The loan amount mustn’t exceed 50% of the pension’s net value.
2. The loan must be secured against a scheme asset, usually the company premises, which could be sold to cover the debt if the business defaults on the loan.
3. The interest on the loan must be payable at a “commercial rate”.
4. The repayment term must be five years or less, although an outstanding amount (plus interest) can be rolled over for a further five years, but only once.
5. Loans must be repaid in equal instalments of capital and interest.

Failing to pass any of these tests will mean the loan is liable for an unauthorised payment charge from HMRC.

Some additional points to consider

• Commercial property includes offices, shops, factories, agricultural land and bare land, hotels and motels, guest houses, nursing homes and public houses.
• Fittings, business equipment or goodwill cannot be included in the commercial property value and cannot be bought by a pension.
• SIPPs and SSASs can be used to buy land for property development (even if the property will be residential once completed), though only while the property is “under construction” or “in development”. It will generally need to be sold before a habitation certificate is received.
• Other forms of business borrowing could include bank loans, a business overdraft, or using personal savings but each comes with its own risks.
• Borrowing from a pension forges a link between the success of the business and the lender’s ability to live their desired lifestyle in retirement.

Get in touch

Buying or investing in commercial property is a huge commitment but linking that commitment to long-term retirement goals comes with added risk.

At Boolers, we can talk you or your business owner clients through all the available options to find the solution that makes the most sense for an individual and their business.

For further advice on the complicated rules around using a pension to help fund a commercial property purchase, please get in touch. Email enquiries@boolers.co.uk or call 0116 240 7070.

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Your pension income could also be affected by the interest rates at the time you take your benefits. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.