New Inheritance Tax Rules Could Impact Commercial Property in Your Pension

The UK government’s recent announcement about changes to inheritance tax (IHT) rules from April 2027 has raised concerns for many pension holders, particularly those who own commercial property through their pensions.

For business owners using Self-Invested Personal Pensions (SIPPs) or Small Self-Administered Schemes (SSAS) to hold their business premises, these changes could have significant financial implications.

Before diving into the changes, it’s worth revisiting why holding commercial property in a pension has been such a popular and tax-efficient strategy.

The Benefits of Holding Commercial Property in a Pension

Owning commercial property through a pension offers several advantages, which have made it a cornerstone of retirement and business planning for many individuals:

1. Tax-Free Growth: Any increase in the value of the property is exempt from capital gains tax (CGT) while it remains within the pension. This allows for significant tax-free growth over time .

2. Tax-Free Rental Income: Rent paid by your business to the pension is tax-free within the pension scheme. This not only grows your pension pot but also ensures that your business premises are effectively funding your retirement.

3. IHT Exemption: Until now, commercial property held in a pension has been exempt from inheritance tax, making it an attractive vehicle for passing on wealth to future generations .

4. Creditor Protection: Assets held within a pension are generally protected from creditors, offering an additional layer of security for business owners.

5. Flexibility for Business Owners: SIPPs and SSAS allow business owners to use their pension funds to purchase their premises, reducing reliance on external landlords and providing greater control over their business operations.

These benefits have made pensions a powerful tool for both retirement planning and business growth. However, the upcoming changes to IHT rules could significantly alter the landscape for those holding commercial property in their pensions.

What’s Changing?

From 6 April 2027, unused pension funds and assets, including commercial property, will be included in the value of an individual’s estate for inheritance tax purposes. This means that the value of the property held in your pension could now be subject to the 40% inheritance tax rate if your estate exceeds the IHT threshold (£325,000 for individuals or £650,000 for couples).

For example:

• If your pension owns a commercial property worth £1 million, and your total estate exceeds the IHT threshold, your heirs could face a £400,000 tax bill on the property’s value.

• This is in addition to any income tax they may need to pay if they withdraw funds from the pension.

Why Does This Matter for Commercial Property Owners?

The inclusion of commercial property in IHT calculations creates several challenges:

1. Double Taxation: Beneficiaries could face both inheritance tax and income tax when accessing funds from the pension. This double taxation could significantly reduce the value of the inheritance.

2. Liquidity Issues: Commercial property is an illiquid asset. If your heirs need to pay a large IHT bill, they may be forced to sell the property, potentially at a loss or under unfavorable conditions .

3. Impact on Business Operations: If the property is integral to your business, a forced sale could disrupt operations or even jeopardize the future of the business.

4. Erosion of Tax Benefits: The new rules undermine one of the key advantages of holding commercial property in a pension—its exemption from IHT.

What Can You Do to Prepare?

While the changes are still a few years away, it’s essential to act now to mitigate the potential impact. Here are some strategies to consider:

1. Review Your Pension Structure
   If your pension holds commercial property, speak to a financial adviser to understand how the new rules will affect your estate. Consider whether alternative ownership structures, such as transferring the property out of the pension, might be more tax-efficient.

2. Explore Lifetime Transfers
   Transferring assets during your lifetime can reduce the value of your estate for IHT purposes. However, this must be done carefully to avoid triggering other tax liabilities, such as capital gains tax.

3. Plan for Liquidity
   If your heirs are likely to face a large IHT bill, ensure there are sufficient liquid assets in your estate to cover it. This could involve building up cash reserves or taking out a life insurance policy to cover the tax liability.

4. Consider Joint Ownership
   If you own the property with other members of your pension scheme (e.g., a spouse or business partner), the IHT liability may be shared, potentially reducing the overall tax burden.

5. Diversify Your Pension Assets
   Holding a significant proportion of your pension in a single commercial property increases risk. Diversifying into other assets, such as stocks or bonds, could provide greater flexibility and reduce the impact of IHT.

The Bigger Picture

The inclusion of commercial property in IHT calculations is part of a broader trend toward tightening tax rules on wealth transfer. While the government argues that these changes promote fairness, critics warn that they could discourage saving and investment, particularly among business owners who rely on pensions to fund their retirement and secure their business premises.

For those who have used SIPPs or SSAS to hold commercial property, these changes represent a significant shift in the tax landscape. However, with careful planning, it’s possible to navigate these challenges and protect your assets for future generations.

Final Thoughts

The new IHT rules on pensions and commercial property are a reminder of the importance of proactive financial planning. If you own your business premises through a pension, now is the time to review your strategy and explore ways to minimize the impact of these changes.

By taking action now, you can ensure that your hard-earned assets are preserved and passed on in the most tax-efficient way possible.

If you’d like to discuss how these changes might affect your specific circumstances, feel free to get in touch. Let’s work together to secure your financial future.