City Trustees - part of Mattioli Woods

News and Media

14 October 2014

Case study: commercial property

Mr and Mrs Smith run a very successful haulage company, which is now into its 20th year. They brought their land and warehouse ten years ago and owned it personally. They were running a partnership at the time, but have since incorporated. Owing to advice from their IFA, they kept the commercial property owned personally and now have a lease in place between the company and the old partnership.

For them the rental was pushing those into the higher rate tax bracket, when they added in their salary and dividends received from the business.

The main objective of the clients was to repay the commercial mortgage against the units quicker, in order to bring forward their retirement date. Their plan was to sell their business and rent the building and land to the new owners, and then receive the rental income as a 'pension' in retirement.
The client was introduced to City Trustees by their IFA, with whom we continuously meet to provide updates on pension legislation.


With the increased flexibility of Self-Administered Pension Schemes (SIPP or SSAS), there is the ability buy back the commercial property they own and to significantly improve their tax position.
With the rental income diverted into the pension scheme (which is received tax-free), the mortgage is repaid faster which saves bank interest and increases the overall retirement fund. As 25% of the pension fund is tax-free at retirement, the marginal rate of tax they would pay on receiving the future rental income from the property would either be 15% for a basic rate taxpayer or 30% for a higher rate taxpayer.

The example below shows how this can be effective:


  • £400,000 property
  • £200,000 commercial mortgage
  • £100,000 insurance company pension
  • £170,000 company pension contribution
  • £135,000 loan drawn from the bank

In the above example, the client's company makes a pension contribution of £170,000 which is then added to the existing insurance company pension, supplemented with a maximum mortgage allowable under pension scheme rules, and then the property is purchased from the client at value for £400,000.

The client redeems their £200,000 commercial mortgage and transfers £170,000 to the company as a director's loan to replace its cash flow from making the contribution.

The director's loan account allows the client to receive future tax-efficient remuneration, the initial company contribution receives tax relief, the rental income is now diverted into the pension scheme to be received tax-free and the client has released £30,000 of liquidity to themselves from the transaction.

The tax reliefs can be significant:

  • £34,000 assumed corporation tax relief on contribution
  • £68,000 assumed tax saved on withdrawals from director's loan account in the future as opposed to receiving salary
  • £16,000 annual tax relief saved assuming annual rent of the property is £40,000 and the client is a 40% taxpayer

In the above example, the pension scheme loan is repaid after four years, which would allow the client to receive a full income from the property with no personal debt. Staying as they were, their own personal mortgage was repayable after nine years.


The ability of pension schemes to borrow from members is extremely flexible and can create highly efficient strategies moving forward. The most important part of the equation is to create additional wealth for the client, which the above example proves is possible by utilising the tax system effectively.

Naturally, the property is legally changing ownership from the client to the pension scheme and so Capital Gains Tax and Stamp Duty Land Tax may be applicable. In the above example, this works well for the client since they will be keen to retain the property as an income-producing asset for their retirement if and when their company has vacated. Accordingly, using a pension scheme to do this minimises the income tax they pay on receiving future rent due to the tax-free lump sum involved.

Furthermore, as the client will lose business property relief on the asset when their own company vacates, there is an even stronger argument to place the property into the pension scheme. If death occurs pre-retirement, this can potentially be paid to their beneficiaries free of inheritance tax; after retirement benefits can be paid to their spouse as a long-term income and thereafter to their children (less 55% tax which is easily outweighed by the upfront and ongoing tax reliefs received).


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