How to develop residential property using your pension fund.

With so many finance products available for property investors in today’s market, it can be overwhelming and confusing when trying to select the best option for your next property development project.

Using your pension to further your property investment goals is quite a foreign concept for many investors and is a little-known finance strategy with much misinformation circulating online. Even IFAs and Pensions Specialists are not always up to speed on exactly what can be achieved using your pension.

That’s where detailed case studies are so powerful, as they can showcase exactly what is possible through a real-life property investment scenario. We’ve put together this case study to showcase how a residential property conversion was achieved using a pension. The financial details give a true and accurate overview of what you could expect if using your pension in a similar property investment scenario.

Meet Ian.

Ian owns a portfolio of businesses including a small property development company. He has an existing SSAS that is invested in a commercial property with the balance looked after by a Discretionary Fund Manager (DFM).

He has recently been granted planning permission to convert the commercial property into residential property but doesn’t have the cashflow available to start work and is concerned about the consequences of attempting a development with the SSAS.

The SSAS is currently valued at £450,000 and the commercial property is valued at £100,000.  If the property is to be converted into dwellings they can’t stay directly in the scheme as they will trigger an unauthorised payment charge of up to 55% at some point.

After seeking professional tax advice, Ian did the following:

• As Ian was aged over 55 he was entitled to PCLS of 25% of the fund which he took as an in specie distribution of the commercial property held by the SSAS tax-free.
• He introduced the property into the development company as a director’s loan.
• The SSAS loaned £50,000 to the development company secured on the commercial property to provide cashflow for the conversion.

This meant that Ian was able to finance his residential property development when he didn’t have the cash elsewhere to do so. It was a great outcome for him, as he completed the project using his pension, without attracting penal tax charges.

Here’s a quick overview of the benefits of using this finance strategy:

• The development company got a tax deduction for the interest payments to the SSAS.
• The SSAS received the income payments tax-free.
• Ian received £100,000 tax-free as repayment of his director’s loan.
• The development company made a pension contribution with the remaining £50,000 profit and obtained a Corporation Tax deduction for it.

Like Ian, you could have similar options available to you if you were to consider using your pension pot as a finance option.

Each property development project, and the financial circumstance of each property investor are of course unique, but we hope this article illustrates exactly what could be achieved when you have the correct pension structure in place.