Since coming in to power the new Labour government has made it clear that UK business and economic growth are top of their to-do list. But how do they do this with the country’s finances in such a poor state, and political instability both within the UK and globally?
Well, it is clear that we need to encourage small and medium-sized enterprises to innovate and thrive, providing an environment that helps businesses and doesn’t hinder them.
While there are many ideas being discussed by government, I would like to see more attention given to how pensions can be used to grow a business and provide long-term financial needs. I do not mean in terms of mandating how much of a pension should be invested in the UK, but rather using a self-invested personal pension or small self-administered scheme to aid business growth, such as a commercial property.
When it comes to pooling investments, a Ssas clearly outperforms a Sipp. This is because a Ssas operates under a common trust fund structure, allowing up to 11 members to pool their pension assets. This means they offer far greater purchasing power when investing, including with commercial property.
I really believe that a Ssas is the perfect retirement vehicle to help the UK government achieve some of its business and economic growth. Intended for business owners, entrepreneurs, small family businesses, company directors or senior employees, a Ssas allows the pension assets and the business to be interlinked, providing growth opportunities to both pots.
Therefore, when it comes to business growth, the pension seems a good place to look to in order to release equity from a commercial property. But unlike Sipps, the Ssas offers more flexible ways to make this happen.
There are significant tax advantages when it comes to commercial property investment via a Ssas. For starters, there is no capital gains tax when a property is sold, which over a long-term property investment can provide a huge opportunity for investment growth in a tax-free way. There’s also no tax payable on the rental income received from any letting of the property, or from any employer contributions made to the Ssas.
There are added benefits for connected tenants occupying the premises on completion of the acquisition, as the rent and any contributions are deducted from the trading profits of the business, resulting in a corporation tax saving. Another consideration when it comes to Ssas and tax savings is that the costs of running the Ssas can be borne by the scheme, again from the trading profits and once more resulting in a corporation tax saving.
With the pooled nature of a Ssas, the purchasing power can be substantially increased, offering the opportunity to invest in higher value properties, which tend to attract higher rental yields and therefore a higher return for the scheme and its members.
Similarly to other pension scheme types like Sipps, a Ssas can purchase property directly from a connected party — as long as the purchase takes place at market value. Any connected transaction needs to take place on market terms to avoid onerous tax charges being levied.
Unlike some Sipps, there is not a relinquishment of sovereignty when it comes to dealing with the property with a Ssas. The scheme members stay very much in control of the property, including property management (unless outsourced) and identifying tenants to occupy the property.
However, this control can be a double-edged sword for trustees if there is no professional trustee involved. Rules around commercial property, as well as compliance with non-pension rules, like energy performance and legal covenants, can be complex. It is here that a good professional trustee can add real value to the scheme, helping to navigate these challenges.
Due to the common trust structure of a Ssas, changing scheme members is simpler than a trust-based Sipp as there would not need to be a legal transfer of a commercial property in the event that one of the members were to exit the arrangement, or pass away and leave their pension to a beneficiary (who steps into the scheme).
This is attractive as the structure allows for more ownership flexibility. Noting that most pensions are predicated on a long-term investment strategy, it is unquestionably the case that there will be scheme changes over the duration of the arrangement. Not incurring legal costs and the inevitable delays at Land Registry is surely an attractive prospect.
Some members will look to their Ssas to release liquidity back to the company by way of the pension acquiring a company owned property. However, a feature unique to a Ssas is the loan back, which is another option that members should consider.
This is a loan from the Ssas back to a connected company. There are specific criteria that need to be met before the loan can be drawn, including a set interest rate, equal repayment instalments and a first legal charge over suitable collateral.
However, if the members are looking to release money from the pension back to their company for a legitimate business purpose such as expansion or growth, a loan back provides a meaningful alternative to the sale of commercial property to the Ssas.
Underpinning all of these advantages is the effective and diligent running of the scheme. With a Ssas, all scheme members must be trustees, and as such when they agree to join the scheme, they are at that point agreeing to take on the fiduciary duties that such a role presents.
Commercial property, whilst popular among Ssas members, is a nuanced investment and can be complicated. Due diligence should be undertaken to fully understand each property on its own merits, before proceeding with an acquisition and a knowledgeable and experienced trustee should be appointed to ensure ongoing compliance with regulatory requirements.
Caitlin Southall is director of Ssas transformation and proposition at WBR Group
