With the speculation rife about the new Labour government’s potential changes to pension policies, planning for a tax-efficient retirement is more pertinent than ever. The manifesto stated that a pension review will be carried out and potentially the current tax relief may be targeted.

One tax-efficient retirement planning method for business owners, which also helps to future-proof their business, involves transferring existing commercial property into a pension fund. The trustees of the pension fund own the legal title of the property, and the business formally leases it from the fund. The business tenant then pays the rent into the pension fund, increasing the pension pot. It can also be factored in if the business is changing /acquiring new premises.

Benefits of Property Transfer to a Pension Fund

This approach offers several attractive advantages. The primary benefit is tax efficiency which is the obvious win but this can also be carried out as part of the business owner’s exit strategy. When selling a business, it’s often challenging for buyers to secure financing for both the business’s goodwill and the acquisition of a freehold property as this is not easy to lend on and the figures won’t often stack up. Taking the freehold property out of the equation and making the business a tenant may ensure a smoother sale.

For business owners with substantial financial stakes tied up in their business, transferring the property into a pension trust can be a tax-efficient way to convert part of their entitlement into personal assets, albeit ring-fenced. This is also a good solution to bear in mind as part of a settlement arrangement for shareholder/partnership disputes as it allows the continuation of jointly owned assets with little ongoing communication necessary between the ‘co-owners’.

Considerations and Drawbacks

While there are significant benefits, there are also important considerations and potential drawbacks. The property may comprise retail units, industrial, office space, licensed premises, nursing homes or even agricultural land. However, if the property contains residential property, this will be a problem as the general rule is that pension funds can only hold commercial property. If the property does include these elements, it is worth considering if the title can be split to remove the residential element. For example, could a long leasehold be granted for the commercial part?

Accountant’s advice will be needed to assess the capital gains tax liability to make sure it’s a financially viable option. In this vein, Stamp Duty Land Tax will be incurred on the transfer but commercial rates are more favourable than residential.

The pension pot must have enough funds to cover the value of the property. Existing pension pots can be transferred and the commercial property can be mortgaged up to a limit of 50% of the net fund value (subject to rental income stacking up against the repayments). This is a long-term solution – as with any trust the business owners should be aware that they are tying up the ownership of the asset, and the fees involved make sense if a long-term view is being taken. The pension provider will insist on thorough due diligence on the property, including a full suite of searches and replies to enquiries. The transaction will be treated at arms-length, with pension trustees limiting their own personal liability as standard.

Any business owner considering this should speak to an Independent Financial Advisor (IFA) experienced in this area to assess the suitability relative to their own unique situation.  Last month, Which magazine released the results of their survey of the SIPP providers in terms of value for money (administration fees need to be weighed up) and customer service. This provides an interesting read for anyone wishing to take control of their future in this way.

By carefully considering these factors and seeking professional advice, business owners can effectively plan for a tax-efficient retirement while supporting their business’s long-term stability.

At Oracle Solicitors, we can assist business client’s with the legal work involved in transferring or acquiring property, as well as handling the legal aspects of any associated mortgage. Our expertise ensures that the process is smooth and compliant with all relevant regulations.