Pros and Cons of Commercial Property in Mortgages

Pros and Cons of Commercial Property in Mortgages

Pros and Cons of Commercial
Property in Pensions
Claire Trott, Head of Technical Support, Talbot and Muir, and Simon Jones of Wren Sterling look at why SIPP holders might look to commercial property as an asset to buy.

Commercial property offers many attractions to Self-Invested Personal Pension (SIPP) investors, especially small to medium businesses with owner managers. Using your company to fund your pension and then buy your commercial premises can be a real benefit to you and your company, especially if you are the tenant, as it will have less impact on your SIPP’s ability to sell the property at a later date. A word of warning though: if the sponsoring company is no longer the tenant or the property was empty for a time within the rental period, it could have a net negative impact on your investment.

Tax efficient investments

The main benefits of owning a commercial property in a pension is tax efficiency. Once within the scheme there will be no Capital Gains Tax (CGT) should you choose to sell it. Rent is received tax free so if this is being used to pay off a mortgage it can be paid off quicker than if you or your company were to own it. If you are the tenant, any rent you pay can be set against corporation tax as a business expense and it will also be funding your retirement. One of the features is the rent which is funding your retirement doesn’t eat into the amount you can contribute to the pension yourself or from your company.

The pension freedoms also mean that there will be greater flexibility with regards to the death benefit options. You can leave the property in the scheme, protected from Inheritance Tax (IHT) for future generations to benefit from: and there will be no forced sale on death to pay large tax charges, even if you have started taking benefits.

Ongoing benefits

Buying your own commercial property from your business can start a process that will mean increased investment in your business as well as a growing pension scheme on which to retire and continue to reap the benefits of the business when you sell.

When the pension buys the commercial property it will release cash back into the business, which can be hard to come by in this current climate. The pension could have borrowed in order to do this and the mortgage should be paid with the rental income payable by your company, to the SIPP. However, you should be aware that borrowing to invest can be a risky strategy as there is a chance that the investment growth rate will not outweigh the interest rate on the money borrowed.

When the mortgage is paid off you will be building up further monies in the pension which could be used to invest in further commercial property for your business to expand into as it grows, or rent out to another business for investment purposes.

In the best case scenario, when you come to retire the commercial properties will hopefully be mortgage free and you can continue to receive a steady income into your retirement, growing in a tax efficient environment. If you decide to sell the property, it will be CGT free.


Care needs to be taken at the outset regarding CGT/corporation tax when selling your commercial premises to your pension fund, and stamp duty land tax would also be payable by the SIPP on the purchase price. Of course, a tax adviser can assess individual circumstances to see if tax obligations can be minimised.

Normal market risk should also be weighed up, and being able to find a buyer for the property at the time a sale is desired is important as a property is essentially illiquid. Selling property may take a long time and you may not be able to sell/cash in the investment when you want to. There is also a risk that the commercial property will not have gained any value when it is in the fund and the time comes to sell, as with any investment. However, if the property does increase in value when it is sold, there is no CGT liability.

Also, if the SIPP consists of several different parties, there may be a point where one party wishes to sell the property and draw down on the SIPP and a buyer cannot be found. Having a range of investments can allow one party to release the cash they require for their pension and retain the commercial property within the SIPP for other parties, subject to their agreement of course.

Complex area

There are many types of property and land you can invest in and taking advice is essential because of the tax changes you might face if you get it wrong. You need to be sure the property will be deemed commercial by HMRC. In addition you need to be sure that if your pension is buying the property from you or your company, it is done in the most tax efficient manner.
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