How inheritance tax changes could affect commercial property in pensions

Many business owners hold their trading premises in a Self-Invested Personal Pension (SIPP) or Small Self-Administered Scheme (SSAS) because of the significant tax advantages. However, planned inheritance tax changes from April 2027 could make this structure less attractive for some families and prompt a review of existing arrangements.

As per the research carried out by the Financial Conduct Authority in 2024, the total assets under management within SIPPs stood at £567bn for circa 5.3 million consumers 1. This market is anticipated to exceed £750bn by 2030 2. Whilst the specific figures for the SSAS market are not readily available, it is expected to be significantly smaller than the SIPP market. 

SIPPs and SSASs can invest in various asset classes subject to some restrictions. A number of SIPPs and SSASs invest in commercial property, whether it is a pure investment proposition or a vehicle to hold the commercial property from where the family business trades. 

There are three main tax benefits of holding commercial property in this way. The rent received by the pension fund is free of any income tax, the growth of the property is also free of Capital Gains Tax, and at present the pension fund is free of Inheritance Tax (IHT). Furthermore, when the trading business pays rent to the SIPP / SSAS, the business would be eligible for tax relief as a business expense. These tax benefits have made it very attractive for many families to hold commercial properties through their pension vehicles. 

However, from 6 April 2027, any undrawn pension funds will form part of the estate for IHT purposes. Even though the pension fund may own the property which the business trades from, the pension fund will not attract any Business Property Relief or Agricultural Property Relief. This creates a paradox for many families who may be asset-rich but cash-poor – the IHT on these pension funds will need to be settled by the deceased’s Personal Representatives by the end of the sixth month after death. Therefore, realising cashflow can prove to be a challenge.  Families may be forced to sell these property assets in a very short space of time which could be difficult depending on the property market and cycle and may not result in the maximum value for them.   

In view of the proposed changes to IHT on pension funds, one possible solution could be to transfer the trading property from the pension fund to the trading business which could be eligible for Business Property Relief (BPR). Noting that for some individuals they will only be able attract 50% relief on this additional value due to the £2.5 million cap on 100% relief for qualifying assets. 

An alternative option could be to hold the commercial property investment in a Family Investment Company (FIC). A FIC is often used a part of wider IHT planning for families allowing the growth of the value of the asset to be attributed to the next generation.   

Transfer of property assets from the pension fund to the trading business or a FIC would likely be subject to Stamp Duty Land Tax which is payable by the transferee, and this will usually be dealt with by a conveyancing solicitor. Such a transfer would need to be carried out a market value and as agreed by the SIPP / SSAS Trustees.  

Another important consideration will be to shore up funding in the trading business or the FIC (as the acquiring vehicles) to facilitate the property transfer. This could be achieved through personal or corporate savings as well as lending from banks. If the acquiring vehicle (e.g. the trading business or the FIC) does not have sufficient funding to acquire the property from the pension fund, then this property transfer for as loan outstanding could result in adverse tax charges.  

Whilst it would be possible for the individual pension member to acquire the property from the pension fund, holding it within the trading business or the FIC is likely to be more tax-efficient. 

This requires careful thought and consideration, and advice should be taken from your tax advisor as well as your Independent Financial Advisor. If you would like assistance, please do not hesitate to get in touch.