The UK property market has always been a popular investment choice for individuals and companies seeking long-term capital growth and stable income. Amongst the various investment vehicles available, Small Self-Administered Schemes (SSAS) have gained popularity for providing an efficient way to invest in commercial property within a pension scheme. We aim to breakdown what a SSAS is, its main key benefits, the how-to's of investing in property through SSAS, and what to consider before taking this route.
What is a SSAS?
A Small Self-Administered Scheme (SSAS) is a type of occupational pension scheme typically set up by directors of limited companies to provide retirement benefits for a small group of key employees or directors. Unlike traditional pension schemes, SSAS's offer a high degree of flexibility and control over investments, including the ability to invest directly in commercial property and some residential type projects.
SSAS allows members (often trustees) to make their own investment decisions, providing the opportunity to diversify their pension fund portfolios. A major appeal of SSAS is its capability to hold assets that other pension schemes generally cannot.
Benefits of SSAS Property Investment
Investing in property through a SSAS has a variety of benefits that make it attractive to business owners and high-net-worth individuals, especially in light of the new government's plans for potential changes to CGT, inheritance tax and so on:
Tax Efficiency: One of the biggest advantages of SSAS property investment is the tax efficiency it offers. Any growth in the value of the property or rental income is currently free from capital gains tax and income tax within the pension scheme. This can lead to significant savings over time and help your pension pot potentially grow faster.
Buy Commercial Property for Your Business: A common use for SSAS's is purchasing commercial property, such as offices, retail spaces, or warehouses for the sponsoring employer's business. This can enable business owners to buy their own premises through the pension scheme, effectively paying rent back into their pension instead of to a third-party landlord. This rent also has the benefit of being exempt from income tax.
Borrowing Capacity: A SSAS is permitted to borrow up to 50% of its net assets to help fund the purchase of a property. This gives the pension scheme additional flexibility to invest in larger or more lucrative properties that may otherwise be unaffordable.
Diversification of Pension Assets: With a SSAS, members can diversify their pension assets by investing in property alongside more traditional investments, such as shares and bonds. This can potentially help to reduce overall risk and provide a tangible, income-producing asset within the pension scheme.
Inheritance Planning: Another major benefit is that the assets held within a SSAS, including property, can be passed on to beneficiaries free from inheritance tax upon death. This makes SSAS an attractive option for long-term wealth preservation.
What Types of Property Can a SSAS Buy?
While SSAS offers flexibility in property investment, there are some restrictions on the type of property that can be purchased:
Commercial Property: A SSAS can invest in commercial property, including offices, shops, factories, and industrial units.
Residential Property: Direct investment in residential property is not permitted by HMRC unless it falls under certain exceptions. Some of these exceptions are student accommodation, care homes, or properties that provide accommodation for staff working at the business. Residential property structured as part of a Genuine Diverse Commercial Vehicle (GDCV) is permitted.
Land: Investment in land is allowed, whether it's for future development or agricultural use, providing further diversification.
It’s important to note that the property must meet the ‘arms-length transaction rule’, meaning it must be bought at market value, and any rent paid by the sponsoring business must also reflect the market rate.
How to Buy Property with a SSAS
The process of purchasing a commercial property with a SSAS can seem complex, but we have tried to break it down into a few simple steps:
Step 1 - Set Up a SSAS: If you don’t already have a SSAS in place, the first step is to establish one. This requires setting up the trust, appointing trustees, and registering the scheme with HMRC. You may want to work with a SSAS provider or pension specialist to handle the technicalities of the setup. If you don't know where to start why not speak to us and we can help point you in the right direction.
Step 2 - Transfer Existing Pension Funds: You can transfer funds from other pension schemes (such as SIPPs or workplace pensions) into the SSAS to provide the capital needed for the property purchase. These transfers are usually tax-free.
Step 3 - Property Search and Purchase: Once the SSAS is funded, you can begin looking for a suitable commercial property or use the property that you had in mind. When you find a property, the SSAS will purchase it directly, and the trustees will hold the legal title. The purchase must be at market value, and you can use the SSAS's borrowing capacity to cover part of the cost if necessary.
Step 4 - Lease the Property to the Business: If the property is being used by your company, a lease will need to be drawn up, and the business will pay rent into the SSAS. This rent will be tax-free within the scheme, providing a steady income stream for the pension fund.
Key Considerations Before Investing
While SSAS property investment offers many advantages, there are important risk factors to consider before proceeding:
Liquidity: Property is an illiquid asset, and selling it quickly may be challenging, especially during periods of market downturn. You should ensure that your SSAS has sufficient liquidity to cover other investment needs and pension payments.
Property Management: Owning a property comes with the responsibility of managing it. This includes ensuring the property complies with rental legislation including health and safety standards, maintenance requirements, and tenant issues. You may need to hire a property management agent or company to handle these aspects and to ensure all legal boxes have been ticked.
Costs: Property investment through SSAS can involve significant costs, including legal fees, stamp duty, and property maintenance expenses. These costs need to be factored into your overall investment strategy.
Restrictions: While SSAS allows for investment in commercial property, there are restrictions, particularly around residential property investments. Ensuring that your investment complies with HMRC rules is crucial to avoid tax penalties.
Conclusion
Investing in property through a Small Self-Administered Scheme (SSAS), potentially offers a unique opportunity for business owners and individuals to leverage their pension funds in a more tax-efficient way. By investing in commercial and other types of property, SSAS members can enjoy benefits such as tax-free rental income, capital growth, and greater control over their pension assets. However, careful planning, expert advice, and compliance with regulations are essential to make the most of this investment strategy.
If you wish to know more about SSAS's and how they could potentially benefit you, then why not join us for our Community Live where we will have a panel of expert guests speaking on this topic. Click the button below to save your seat:
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