Selling your business premises to your own pension: the market value rule, and what a wrong price costs
Selling a company's premises to the directors' own pension and leasing them back is a well-worn arrangement, and a legitimate one. It rests on a single condition that is easy to state and easy to get wrong: every price and every rent must be what strangers would agree. Here is who counts as connected, what a price above market value costs in tax, the residential line, the funding limits and the in-specie contribution point that still catches people out.
Why the arrangement is common
A director owns, personally or through a company, the building the trading company occupies. The director's self-invested personal pension, or a self-administered pension of which the director is a member, buys it. The trading company pays rent to the pension, which it can normally deduct, and the pension receives that rent free of income tax under section 186 of the Finance Act 2004. The member's retirement savings end up holding a real asset the member understands. None of this is exotic. What makes it work, or fail, is the price.
The rule: strangers' prices, in both directions
HMRC's Pensions Tax Manual, at PTM121000, states the position directly. When a registered pension buys an asset from, or sells an asset to, a member, a sponsoring employer or a person connected with either, the price should be what might be expected between people at arm's length. If the pension pays more than the asset is worth, or sells for less, the difference is treated as an unauthorised payment. A payment for this purpose includes a transfer of assets and any other transfer of money's worth, under section 161(2) of the 2004 Act, and payments to a connected person are treated as made to the member or employer with whom they are connected.
Who counts as connected
Connection is defined by section 993 of the Income Tax Act 2007, as HMRC explain at PTM027000. It covers the member's spouse or civil partner; their relatives, meaning brothers, sisters, ancestors and lineal descendants; the spouses and civil partners of those relatives; and the relatives of the member's own spouse or civil partner. A company is connected with the member if the member controls it, alone or together with connected persons. In practice the member's own trading company, the member's property company and a sibling's company can all sit on the far side of a connected transaction.
What a wrong price costs
The member, or the employer where the payment is to the employer, bears the unauthorised payments charge at 40 per cent of the amount. The pension's administrator bears a sanction charge of 40 per cent, reduced to 15 per cent where the 40 per cent charge has been paid, so the combined rate is usually 55 per cent. A surcharge of a further 15 per cent applies where unauthorised payments in a twelve-month period reach 25 per cent or more of the member's pension rights. The figures that follow are illustrative. Premises independently valued at GBP 400,000 are sold to the director's pension for GBP 450,000. The GBP 50,000 excess is an unauthorised payment. The charges come to GBP 20,000 on the member and GBP 7,500 on the administrator, and the pension has also paid GBP 50,000 more than the building is worth. One generous figure has cost the family GBP 27,500 in tax and left a hole of GBP 50,000 in the retirement fund.
The residential line
Most self-invested personal pensions and self-administered pensions are investment-regulated, and residential property held by them is taxable property that triggers charges on both the member and the administrator. Commercial property is outside those rules. The line matters for mixed buildings. A flat above a shop is residential, and it escapes the charge only in narrow cases: where it is occupied by an employee, unconnected with the member or the employer, who is required to live there for the job, or where it is occupied by an unconnected person and used in connection with business premises held as an investment, such as a flat leased with the shop below. A flat above the director's own shop, let to the director's daughter, is squarely inside the charge.
Leasing back, and the rent reviews that follow
Once the pension owns the building, the lease to the member's company is itself a connected transaction. The rent should be a market rent, and the reviews should be on normal commercial terms. HMRC's guidance on value shifting, at PTM133700, gives the example of a pension that sells a freehold to the employer for a small sum subject to a lease back to the pension, after which the rent the pension pays is increased significantly: value has passed out of the pension. A rent set below market, or a review quietly skipped, is open to the same analysis in the other direction. Keep the valuation evidence for every review as carefully as for the purchase.
Funding the purchase
A registered pension may borrow up to 50 per cent of the net value of the fund immediately before the borrowing; above that, the excess attracts a 40 per cent charge on the administrator. Borrowing from the member, the employer or anyone connected with them must be at a commercial rate. Some members prefer to contribute the building itself, and here the Upper Tribunal's decision in HMRC v Sippchoice Ltd [2020] UKUT 149 (TCC) matters: tax relief is given for contributions paid in money, not for an asset handed over. HMRC's guidance at PTM042100 accepts a route that keeps the contribution monetary: a clear, recoverable obligation to pay a stated sum, a separate agreement to sell the asset to the pension at market value, and a separate agreement to set one against the other, each evidenced at the time. If the asset is worth less than the contribution promised, the balance must be paid in cash for all of it to qualify.
The other taxes on the way in
The pension pays SDLT on the price at the non-residential rates: nothing on the first GBP 150,000, 2 per cent on the next GBP 100,000 and 5 per cent above GBP 250,000, which is GBP 9,500 on a GBP 400,000 building. The seller has a disposal for capital gains tax or corporation tax on its own gain. If the building has been opted to tax for VAT, the sale is standard-rated unless it qualifies as the transfer of a going concern, which for a let building has its own conditions.
Before contracts are exchanged
Commission an independent valuation from a qualified surveyor, addressed to the trustees or the provider and dated close to exchange. Confirm that no part of the building is residential, or that any flat fits one of the narrow exclusions. Set the lease rent from the same evidence and diarise the reviews. Check the borrowing limit against the fund's net value at the date of drawdown. If the member intends to contribute rather than sell, put the three agreements in place, in the right order, before anything is transferred. Every one of these steps costs far less than 55 per cent of a mistake.
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This article is general information only and does not constitute tax advice. Figures and dates are current as at the date of writing; any worked example is illustrative. Always consult a qualified adviser before acting.