It is possible to purchase property in a pension fund. The trust deed of the fund will empower the trustees to invest the scheme’s assets to the benefit of the scheme, including the purchase of commercial property and the power to borrow to that end.
However, the trustees of a company scheme with 40 potential beneficiaries may take a more cautious view of such an investment than, say, three controlling directors putting a property into a fund for just their benefit.
Whatever sort of scheme it is, the loan would be made to the trustees of the fund, secured by a first charge on the property ‘ which must therefore be freehold or long leasehold. The trustees will grant the company occupying the property a standard, full repairing and insuring lease at an open market rent. That rent will have to be sufficient to service the loan repayments and cover any incidental expenses for managing the investment. The principal benefits of this arrangement are that the rent paid by the ‘tenant’ company is allowable for tax, and both the rent receivable and any capital gain on the eventual sale of the property will be sheltered from tax in the fund.
There are some downsides to consider ‘ for example, the set up costs will be greater than a straight purchase in the company’s name, such as professional fees, Stamp Duty on the lease and so on.
If the company’s bank has a charge on the existing premises to secure an overdraft, they may not be happy to see the asset effectively moved into the fund’s name and out of their reach. This would be seen as an investment loan, reliant upon the ability of the tenant to pay the rent, rather than a loan to a trading company.
All in all, your client should investigate the advantages of buying in the pension fund early ‘ it is one area where it is easy to be wise after the event but one cannot normally transfer an existing property asset into a pension fund.
Chris Halliday
