Buying property with a pension fund was a hot topic in the run-up to the new pension reforms (effective April 2015). Most of the comment focused on residential buy to let properties and was somewhat misleading as pension funds are unable to hold residential property as an asset. For business owners, and those looking to invest in commercial property, in particular, the reforms offer a number of opportunities.
This is not an area to jump into without detailed consideration as the rules can be complex and alongside the benefits, there are potential risks to consider. Commercial property investment is generally only suitable for experienced investors and/or those who have engaged an experienced financial adviser and should always be part of a diversified investment portfolio within the pension fund.
The definition of commercial property is wide but includes offices, industrial units, retail premises, hotels and even farmland. With its combination of return on capital and income generation, the returns on commercial property have historically beaten inflation by a significant margin. In recent years the performance has been particularly strong with office rents increasing by over 7% in 2014. Typical commercial property investments include:
- Buying into a commercial property fund.
- Purchase of own business premises.
- Purchase of other business premises.
- Investment in land for building.
A major attraction of Self Invested Personal Pensions (SIPPs) is that they can invest in commercial property (but not in residential property).
Buying Into A Commercial Property Fund
The major benefit of commercial property funds is that they give investors access to a range of commercial properties in different geographic areas and various industrial sectors and thereby reduce risk. They are also managed by specialists with expert knowledge of the sector.
If a business owns its own property or portfolio of properties, it is difficult to access the capital invested quickly should circumstances change. The same is not true of a fund although it is important to note the depending on the fund type there may be significant fees associated with withdrawing capital and delays in market downturns. Although investment in a fund requires little effort the issue of fees should not be overlooked. Costs of property managers, fund managers and auditors should all be considered.
Purchase Own Business Property
There are advantages for small businesses in buying their own business premises and putting them in a Self Invested Pension Fund. Any capital growth in the value of the property and the rental income the business pays to occupy the premises adds to the value of the pension fund. There are attractive tax advantages in using the pension fund this way. Rental income is received tax-free by the pension fund and when the property is sold, there is no capital gains tax.
Purchase Of Other Business Premises
Instead of (or in addition to) owning the main business premises business owners can own other business premises and retain the capital investment while securing a rental income from the tenant. This is a similar process to the private property buy to let market and carries the same risks associated with empty premises (if a tenant moves on) and the investment of time, effort and resources in managing the property.
Of course, it is possible for the pension scheme to employ a property manager but this incurs costs. There is a decision to be made over a hands on approach to maximise returns or hands off with costs but potentially a more professional approach.
Invest in land for building
A more radical approach for those with an understanding of property, with perhaps a background in planning, land purchase or the building trades, is to use a pension fund to buy vacant land and obtain residential planning permission.
This process increases the value of the land so it may be sold at a profit before building begins or after the residential property is in place. This is a potentially high-risk strategy and it is essential to have a clear understanding of the position with HMRC before considering this approach.
There are a number of potential risks to consider when considering buying property with a pension fund and it is always best to take advice from an independent Financial Adviser with experience in the specialist pension investment you may wish to consider.
Commercial property funds have higher running costs than those that invest in other assets such as shares and bonds. There are potential high exit fees and withdrawals may be restricted or even delayed for periods of up to six months. Property funds are not exempt from problems in the markets and some took a major hit during the financial crisis in of 2008.
Purchase of any property carries long established risks. Appropriate surveys are essential to identify problems such as subsidence or damp. For business properties, there are other significant financial risks associated with environmental factors such as asbestos or issues related to prior use.
When considering potential returns it is vitally important to fully understand the tax position and the potential impact of fees. With property investment, there could be significant fees associated with employing fund managers, property managers, surveyors, building specialists and solicitors.
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The information in this article does not constitute financial or other professional advice.