Jeff Steedman: Pensions & retaining the company premises – it’s all about the tax

Property sale to a client’s pension scheme can be a tax efficient opportunity, writes Jeff Steedman, and could knit a clever solution to their company sales and retirement ambitions

Directors selling a company may not realise they need both financial advice and legal advice if they want to keep the commercial premises and place them into their self-invested personal pension (SIPP) or small self-administered scheme (SSAS).

There are thousands of SME companies sold in the UK every year and the directors of these companies are often guided by accountants and solicitors during the sale process.  However, many of these clients will also need guidance and advice from financial advisers on the tax benefits of placing the commercial property assets within a pension scheme.

When SMEs owners are nearing retirement they will be looking for the best way to exit their business and maximise the cash they can extract from the sale. The management of the tax they will pay on sale of the company is complex and specific accountancy advice is needed.

The company assets are often made up of several core components including goodwill, fixtures and fittings, machinery, stock and often the premises the company trades from.  Any potential purchaser of the company is likely to place a value on each of the company’s assets and they may not wish, or be able to afford, to purchase the company premises.

Property sale to the client’s pension scheme

This gives rise to an opportunity for the client to sell the company premises, but to their own tax-efficient pension scheme via a SIPP or a SSAS. The pension scheme can then lease the property to the new owners, perhaps with an option to buy in five or 10 years.

Rental values can vary, but typically a commercial property would generate a rental income of between 6% and 10% – tax free in a pension – providing strong steady growth for the client’s pension.

The client is still effectively selling all parts of the company and getting all the income from the sale, and completely exits the company and associated responsibility. Of course, this only works if the client has sufficient existing pensions, or liquidity for new contributions, that can create a large enough pension pot to finance the property purchase – limited by annual allowances, of course.

Tax advantages of owning a property in a pension

These are well documented and include:

  • Rent received is tax-efficient – no income tax to pay
  • A good tenant signing a 5 or 10 year lease will provide secure income. This income can provide excellent liquidity for the pension to pay regular drawdown income to the clients, something on which ongoing advice may be welcomed
  • No future Capital Gains Tax (CGT) on any growth in the value of the property
  • Pension assets sit outside of Inheritance Tax (IHT). This can be exceptionally important to many clients in this position

Potential disadvantages of owning a property in a pension

These too are worth considering:

  • Stamp Duty – this is payable upon purchase by the SIPP/SSAS subject to the regional variations and the initial “CGT free” limit of £150k
  • Liquidity at retirement – if 100% of the clients’ pensions are used to buy the property, there may not be liquidity left to pay the full pension commencement lump sum – albeit the client may well be cash rich from the company and property sale
  • SIPP / SSAS fees – there will be one-off and ongoing SIPP/SSAS fees, legal / surveyor fees, as well as adviser fees when the pension buys the property

Engagement with clients

As you stay close to your SME clients, and perhaps network with their friends, accountants and solicitors, keep an eye out for those for whom a SIPP or SSAS may knit a clever solution to their company sale and retirement ambitions.

Jeff Steedman is head of business development at Xafinity SIPP & SSAS