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:
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
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 firstname.lastname@example.org or call 0116 240 7070.
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.
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