Pensions & Business Expansion Plans

Pensions are rarely thought of when business owners are trying to raise capital to fund expansion plans. However, Self-Invested Personal Pensions (SIPPs) and Small Self-Administered Schemes (SSASs) can be very useful vehicles to do this.

Funding business expansion through pensions

If a company owns the commercial premises that they operate out of, they are sitting on an illiquid asset. A SIPP or SSAS is able to hold commercial property and this could be a way to release capital for the business whilst building up pension provision at the same time. The SIPP/SSAS would purchase the commercial property from the company allowing valuable capital to be directed elsewhere in the business.

Rental income paid to the SIPP/SSAS is free of income tax and it is also an allowable business expense, thus reducing the corporation tax liability. The funds within the SIPP/SSAS can grow free of income tax and capital gains tax. It is also outside of an individual’s estate for inheritance tax purposes.

Most types of commercial property are acceptable, including:

  • Shops
  • Offices
  • Warehouses
  • Industrial units
  • Factories

Residential property is not allowed.

Disadvantages

There are, of course, disadvantages to purchasing commercial property through a pension scheme. Property is naturally an illiquid asset and if it needs to be sold in a property downturn, the proceeds may be significantly less than the purchase price. The company would have to pay a full market rent to the SIPP and it could no longer be used as security for the company. Regular revaluations are required when the member reaches retirement and it may reduce the value of the overall company if it does not own the commercial premises.

Case study

Peter is the owner and director of an auto parts company for classic cars. His limited company owns the commercial premises that he operates out of and it is worth £200,000 with an outstanding mortgage of £30,000.

The company is growing and Peter is looking at expanding the business but does not have sufficient funds to do this. Peter has a private pension worth £130,000 which is transferred to a newly established SIPP. The company is able to make a pension contribution of £10,000 taking the total SIPP value to £140,000. The SIPP can then borrow up to 50% of its net asset value.

The SIPP borrows £70,000 and can then purchase the commercial property from the business, as well as covering the costs involved. The business pays the market rent to the SIPP, increasing the value of the SIPP, and this rent is a deductible expense for the company. The rental income that accrues is tax free and could then be invested to diversify the holdings of the SIPP where it will grow free of income tax and capital gains tax.

The business can pay off the outstanding mortgage, which frees up cash flow, and use the remaining proceeds to fund expansion plans. This method avoids the cost of finance to fund development plans.

The commercial property could be bought by several SIPPs if there was more than one director.

In summary, direct commercial property investment is not for the inexperienced investor or one averse to risk, but can be attractive for those looking to develop their business, whilst having greater control over their pension investments.

Funding business expansion through pensions

How Nelsons Can Help

Fabian Taylor is an Associate and Chartered Financial Planner in our Wealth Management team.

For further information on funding business expansion through pensions or any related subjects, please contact Fabian or another member of the team in Derby, Leicester or Nottingham on 0800 0241 976 or via our online form.