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.
