Buying a Property through your Pension

For most pension investors, exposure to property within the pension comes from investing in a property fund, usually in the form of an OEIC or Unit Trust. Investor’s money is pooled with other investor’s money and used by the fund managers to purchase office blocks, warehouses and other commercial property, with a view to generating a return in the form of rent and appreciation of the property value. 

If you wish to have property as part of your pension this can be a good way of accessing a diversified property portfolio with small levels of investment. Like purchasing a property personally outside of an investment fund, property funds can face the same liquidity issues. If you reach retirement and require access to your capital in the form of a lump sum or regular income, you need the fund to have sufficient cash flow to be able to pay you and other investors. If there is not sufficient cash to pay all redemptions, unlike equities that can usually be sold on an exchange quickly to free up cash, property requires a buyer to be sought and it’s a much longer process. As such it is more likely than equity-based investments to have to restrict outflows until capital can be freed up.

Its possible to purchase property directly within a pension however, a more specialised often more expensive pension type is required known as a Self Invested Personal Pension (SIPP) or a Small Self-administered scheme (SSAS). I won’t go into depth here about the different pension types as this will be covered in a separate article in its own right. 

At Howard Wright, we often get asked if it is possible to purchase a residential property through a pension, either as a main residence or a buy to let. The simple answer to this question is yes but it’s not usually a good option. The longer answer is that whilst it is technically possible to purchase residential property within your SIPP or SSAS, you would usually face a tax bill of 55% on the value of the property with any investment gains also suffering a further tax charge as well. Its worth adding that most SIPP providers wouldn’t allow you to invest in a residential property even if you were willing to pay the 55% tax charge. 

Although investing in a residential property isn’t really an option you are able to purchase commercial property within your SIPP or SSAS. Commercial property that is permitted is very broad, the most common we see at Howard Wright is business owners buying their factory units or office blocks so that the business pays the rent to the pension and they benefit from their own rental payments. Other permitted property types include but are not limited to shops, restaurants, farmland, airports or even Zoo’s. A major benefit of holding the property in the pension is that the rental income can be accumulated in the pension tax free and any growth in the value of the property will also be free of tax whilst in the pension.

Similar to the property funds, consideration should be given to liquidity when buying a commercial property directly within the pension especially when approaching retirement. If you wish to start drawing an income but the majority of your capital is tied up in property, you may not have the cash available to fund your required withdrawals. As we know, you can’t sell 10 bricks a door and a window, you would need to sell the entire property which may take longer than you would like.

Stamp duty on pension property purchase

Just like buying a property personally, when using your pension to buy a commercial property, the purchase will be subject to Stamp Duty. The stamp duty will be payable by the pension at the same rate as a none pension transaction 0% on the first £150,000 2% on the next £100,000 and 5% over this. 

If VAT is payable it equates to 20% of the purchase price. Therefore if a pension is buying a commercial property for £200,000 if it is subject to VAT the cost of the purchase will rise by £40,000. It is possible for a pension to claim back the VAT as long as it is registered for that however it would need to fund the VAT cost first and then reclaim it after the purchase. A point to note here is that the stamp duty is payable on both the purchase price and the VAT. The stamp duty paid on the VAT unfortunately cannot be reclaimed.

If you do not have sufficient capital within a pension to purchase the property you would like. It is possible to borrow money. The maximum amount that a pension scheme can borrow is 50% of its value. It is common for loans to pensions to be through financial institutions however, the rules do allow for borrowing from other sources such as the pension holder’s own company. Any loan must be made on commercial terms. This means that you would not be able to loan your own pension money at a below-market rate.