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.

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