For those in business, be they self employed or directors of limited companies, there are a number of choices when it comes to owning commercial property, personal ownership, ownership by the business and ownership through your pension. Here we highlight the advantages of pension fund ownership, but also point out some disadvantages and restrictions that should be considered before committing to the pension fund route. The article also draws attention to the changes coming in April 2006 and highlights any action that should be considered before then.

For this purpose we have looked at the situation where the property is occupied by the business itself rather than purchased purely as an investment vehicle to be rented out to unconnected parties. We look at the position in relation to directors of limited companies using a SSAS framework, rather than the self employed where the different SIPP regime would apply.

Often the deciding factor for pension fund property purchase is simply that that is where the money is.

Contributions made to provide or increase existing funds would normally have attracted corporation tax relief or personal income tax relief, reducing the effective cost of property purchase. A member can transfer funds in from previous employments and Personal Pensions, “unlocking” funds that had been seen as offering little in the way of investment potential.

Where necessary, the pension fund can borrow, currently up to 45% of the fund plus three times the annual scheme contribution. Borrowing will normally be from a commercial lender however, a SSAS can borrow from anyone, provided it is done on a commercial basis.

There is no liability to capital gains tax on any growth in the value of the property. Rents paid by the company would be a deductible business expense and there is no liability to income tax in the hands of the pension fund trustees. Any rents not required to service borrowings increase the ultimate retirement benefits for the members. It is certainly attractive to have rents coming out of the company in this fashion to be invested in the tax favoured environment of your pension fund.

This route can be particularly attractive for family owned businesses, where the property can remain within the pension scheme as an investment for many years, effectively allowing several generations to retain control. A retiring member could receive income in retirement funded out of rental income, leaving the property invested for further generations. The ability to defer the purchase of an annuity on retirement allows these planning opportunities and this deferment is to be extended following changes in legislation in April 2006.

On death before retirement, a member’s entitlement to the fund would be paid as cash to nominated beneficiaries free of Inheritance Tax. This highlights not only the tax advantages of pension funds but also the liquidity issues which can arise where the funds are made up primarily of business property. The untimely death of a member may force the sale of property with unpalatable consequences for the business – the commercial value may not be realised; the premises from which the business trades would be sold. A property cannot currently be transferred to anyone connected with the pension scheme member.

More generally, the liquidity of the pension fund should be considered particularly as members approach retirement. There will need to be sufficient liquidity to pay the tax free lump sum, pension instalments as they fall due and eventually to buy out the member’s pension.

Overall the investment objectives of a pension scheme should be kept in mind. Concentrated investment in one property leads to a lack of diversification and therefore greater risk. Long term returns rely on a suitable balance between the various asset classes of property, equities and fixed interest investments, with cash to provide ready accessibility to funds.

There is one further consideration to highlight that is often not apparent until the deal is done – the property is no longer in your control. “Your” property now belongs to the trustees of your pension fund, of whom you are just one. Inland Revenue regulations will determine how you can deal with the property, for example a capital and rental valuation will be required at least every three years; rents will be commercial and be paid on time; you will not be able to pay bills out of the pension fund account without the signature of the independent trustees.

Independent trustees will co-own the property. The ongoing costs of professional trustee services and the additional requirements and restrictions need to be taken into account at outset to avoid frustration later on. Where they are, we find that pension fund ownership of the business premises offers significant advantages and works well.

It has been big news that, after 6 th April next year, we will be able to buy residential property with our pension funds, even our domestic home. Quite how popular (or practical) a proposition this is remains to be seen – more likely will be investment into residential investment properties – the buy-to-let – which is currently prohibited.

It will no longer be a requirement to buy an annuity at age 75 and this opens up the possibility of holding properties, potentially indefinitely, within a pension “wrapper”, the properties passing on death from one generation of scheme member to another under the “family pension” concept. It will not be necessary for children and grandchildren to be employed within the business for them to be a member of the pension fund. At present the tax treatment of such benefits on death is yet to be finalised.

Other restrictions will disappear – it will be possible to buy and sell assets between the scheme and the member. This is a welcome relaxation of the current restrictive rules.

Scheme borrowing will be restricted to 50% of the net assets of the fund. For SSASs, this could be an improvement or not, depending on the fund value and contribution levels. For SIPPs, incidentally, this is a significant tightening of the current borrowing limits and, anyone considering property purchase through a SIPP, using borrowing, should consider action before April 2006.

More generally, funding the scheme will become much more straightforward, based on a single universal limit for tax favoured contributions, initially of £215,000 and there will be a “lifetime allowance” placed on an individual’s pension funds, initially £1.5 million. Above this level there would be a tax charge. We have a number of schemes, where property is an asset, which exceed this amount now. The funds can be protected and action needs to be taken before 6 th April 2006 .