Owner Occupied Pension changes

Time Running Out To Purchase Commercial Property In A Pension with Large Borrowings

It is a little-commented-upon consequence of the A-Day pension changes in April 2006 that means that owner-occupiers who buy their own buildings using their pensions could become an endangered species next year. For those business owners who have not yet bought their own premises within their company pension scheme, time is fast running out to take advantage of this incredibly tax-efficient opportunity. The same problem applies to investors who are seeking a highly geared property investment using pension money and they must act quickly and complete on the building purchase before A Day next year.

By way of background, owner-occupiers only have 2 choices - to rent premises, or to buy them. If they buy the premises, it is significantly tax advantageous to do so within their company pension, usually as an SSAS or a SIPP. Not only does the property grow in value, tax-free within the pension, but the rent paid by the company to the pension is received tax-free and can be used to pay off the mortgage much quicker than if the rent was having tax deducted by the Inland Revenue. Effectively, a company owner is paying rent tax-free to their own pension fund which, in turn, is growing a property asset within the same tax-free environment. Currently within a SIPP a pension can borrow 75% of the building value and this means the company bosses need to raise 25% of the building price as cash within their pension - not a small amount of money for many businesses, but achievable nontheless.

The problem comes under the proposals due to come into force on A-Day - 6 April 2006 - when a borrowing restriction is proposed to be introduced that limits borrowing to as little as 33% of the building value and it is safe to say that most businesses will not be able to afford to raise a cash deposit of 67% of the building price. Under the proposed new legislation this will signal the end of tax-efficient owner-occupier property ownership as we know it. The actual pension regime change will limit borrowing to 50% of the net scheme assets and in most cases with the net assets being the deposit for the building this means that the 33% limit on borrowing is likely to be encountered by many buyers.

The only solution is to act fast. Business owners and, in fact, all people with moderate pension savings, should certainly consider their position with regard to commercial property investment before A-Day. Even if a business owner cannot afford the right premises for their business before 2006, they should seriously consider buying a commercial property in any case under the very advantageous lending rules that apply today, and to worry about maybe buying their business premises privately after A-Day. At least in this way people can make use of the excellent borrowing level currently on offer for commercial property within pensions.

In terms of an example, the deposit required today on a £1m office building, would be £250,000. However, after A-Day, it would be £670,000. In terms of an example of tax benefits, if someone was buying a building within a pension it may be possible to pay off the mortgage over say 12 years, but if the building had been bought privately and the rent income was taxable, it might take 15 to 18 years to pay off the mortgage instead. A significant extra cost! Potential owner-occupiers should move very quickly to secure a building for their business or, if this is not possible, to set up a pension-based commercial property investment of another type before April next year.

See all of our other property investment articles here.

 



horizontal rule

Risk Warning and Disclaimer : The price of property can go down as well as up. Historic performance should not be taken as a guarantee of future performance. Geared property investment with mortgages can increase risk of losing money as well as increasing the possible gains. Mortgage products referred to in the website can be withdrawn by the lender or have rates or other terms changed without notice and reference to any products does not imply they are certain to be available in the future. Mortgages referred to may also have certain applicant restrictions and are for indicative purposes only although reasonable endeavours have been used to ensure that they are available at the time of publication and are applicable to a significant number of our purchasers. This site is for information purposes only and nothing on this site should be taken as definitive investment advice for your particular situation without you seeking additional guidance directly from ourselves or from other finance and property professionals. Property particulars on this site do not form part of an offer or contract. The developer and Assetz for Investors Ltd, whilst endeavouring to ensure complete accuracy in these property particulars, cannot accept liability for any errors. Valuations of property or indicated rents achievable are either estimated or derived from valuations and/or comparables and can change and should not be relied upon without your own additional valuation and research, but we have carried out reasonable endeavours to achieve accurate indications for these figures. All descriptions, dimensions, areas, reference to condition and, if necessary, permissions for use and occupation and their details, are given in good faith as provided by the developer and are believed to be correct. However, these are subject to change, especially, but not wholly, relating to any property that is off-plan or not yet complete. Any intending purchaser should not rely on them as statements or representations of fact but must satisfy themselves by inspection or otherwise as to their accuracy. The onus is on each individual investor to undertake their own due diligence, enquiries and inspections. Our standard Terms and Conditions of Sale will apply. E. & O. E.

Content on this page requires a newer version of Adobe Flash Player.

Get Adobe Flash player