Q: Can I buy commercial property with my pension?
A: Yes, you can, but most people don’t.
Q: Is it a good idea?
A: No, not for most people.
I’ve had this exchange more times than I care to remember, but to date the only people I have actually advised with commercial properties in their pensions are those desperate to get out of the arrangement. Here’s a few reasons why it’s not quite as good as it seems:
Liquidity – commercial property is a single asset and is subject to the market forces affecting it at any given time. With commercial properties, those forces can make the asset illiquid (difficult to sell). If demand is low, you may not be able to sell at the price you want, or to a buyer you are happy with. You may not be able to rent it either, giving you no ongoing investment return either.
Consolidated Risk – if the property is rented to your company, the rent goes into your pension. Sounds great, but what if the company fails? You will have no tenant, and you may have a mortgage in your pension which needs to be paid, when you have no income to make contributions. Keeping your company, your pension, and your home separate is always the safest policy – it is simply not keeping all your eggs in one basket.
Tax on exit – having tax deductible rent paid into your pension sounds great. So does tax relief on altering ownership of the property. But what is the exit strategy, and what tax will be paid when you sell? Remember: if the pension sells the property, it gets the proceeds, so 75% of that money is subject to income tax. If the pension sells it back to you for a £1, and you sell it on, capital gains tax at property rates become due on almost the whole value.
Costs – these arrangements are complicated, so a lot of advisers are included. You can end up paying an IFA, a solicitor, an accountant and a surveyor – all of whom charge professional level fees. Property investment comes with other costs too, such as maintenance, valuations, inspections, rates and utilities; you may also have void periods so if your rent is a little lower, and your costs a little higher, is the benefit worth the risks?
My view is that I wouldn’t do it, so how can I recommend any investor do it? Keep your financial life simple: business, pension and home are all separate legal entities and should be kept that way.