How to purchase mixed use property using your pension

When purchasing commercial property with a residential element (such as a shop with flats above it), this can cause additional complexities when purchasing using a SSAS pension.

Buying residential property through your pension would usually incur a huge 55% charge, but a tax advisor is sometimes able to find a practical solution that allows you to benefit from your pension fund and avoid the 55% unauthorised payment charge.

This article talks you through a worked example of how a pension scheme was used to successfully purchased a mixed-use property.

Meet Emma.

Emma owns a successful recruitment business and is looking for her own offices to move her growing team into. She has found a freehold property with vacant possession in the local area that consists of a retail shopfront with offices behind and a residential flat above.

Emma has a pension from her previous employment but hasn’t contributed to it for many years. She has been discussing the prospect of setting-up a SSAS for her business for some time and would ideally like to purchase the property this way but has been advised of the complexities of residential property in a pension and wonders if its viable in this instance.

The property value is £325,000 and the surveyors report splits the value at £200,000 for the commercial element and £125,00 for the residential.

As things stand there would be prohibitive tax charges if she set up a SSAS and purchased the property due to the residential element. The value of the investment in the residential part would be classed as an unauthorised payment and taxed at up to 55%.

The challenge in this case is that freehold titles can only be split with properties adjacent to the subject property in England and Wales. Flats (or indeed anything above or below) are caught by this.

The tax advisor was able to come up with a practical solution to a complex situation, which included creating a leasehold interest within the existing freehold title. The steps that were followed are:

  • Offer made to vendor to purchase the property for £325,000
  • Valuation carried out by surveyor confirming the value of the intended leasehold and commercial element
  • A SSAS is set-up and existing pension transferred into it
  • The SSAS trustees formally appoint a solicitor to act for them in the purchase:
  • Legal work commences to transfer freehold title
  • Solicitor simultaneously creates a new leasehold title on the commercial part of the property.
  • The freehold transfers to Emma and the leasehold for the commercial to Emma’s SSAS
  • The SSAS releases £200,000 and Emma £125,000 to the solicitor as consideration
  • The vendor receives £325,000 to complete the purchase of freehold title

The SSAS was left with no interest in the residential element and therefore no nasty tax charges were incurred. Emma was left with complete control over what could be done to the property in the future (i.e. converting the residential element into commercial space as her team continues to grow).

If you are facing a complex purchase and would like specialist help formulating a solution using your pension that would work best from a tax and investment perspective, please get in touch.