If, like many business owners, you hold commercial property within your pension scheme, and that property is directly linked to your business, you’ll have some important decisions to make around what to do with the property when you retire.
While property is a great value asset, it’s not the most liquid investment around. So how can you make your commercial property ‘work’ for you in retirement? In this article we give a brief introduction to commercial property and pensions.
Navigating the complexities
Holding property within a pension can be incredibly tax efficient, but it does create some complexities. For example, the property is owned by the pension, not the business, which can muddy the waters if you want to sell the company. Or, if you intend to hand the business over to family and want to make them purchase the property, pension rules state that commercial property must be valued at market rates, which may make it unattractive to the younger generation. What if they want to take on the business, but not the property that comes with it?
Then there’s the issue of the pension lifetime allowance, currently set at £1.03 million.
Particularly in London and the South East, commercial property is expensive, and plenty of business owners find themselves with a property they acquired years ago that’s now worth many hundreds of thousands of pounds at market rate – pushing them over the lifetime allowance and triggering a tax charge.
All you need is a plan
You don’t want to be left with a high-value asset in your pension, with no plan for selling it or generating an income from it – or having to pay unnecessary tax penalties. The key is to think ahead and decide what will happen to the property in the future: How will you sell the property to realise the cash? Or, if it’s more efficient to keep the property in your pension, how will you generate rental yield from it? Will you wind up the business and simply rent the place out? Crucially, this must all be considered as early as possible, not just before you retire. Ascot Lloyd regularly works with business owners at various stages of their business to review their pension and plan ahead. This may include spreading investments, for example, by holding additional cash investments that will act as a cushion in the first year of retirement.
Holding commercial property in your pension can be very tax efficient, but it’s important to think about how you’ll get the most out of that property when you retire.