Buying your own premises is one of the biggest investments your business can make. By definition, it ties up capital for a long time. However, if you have funds set aside for a deposit and you’re confident the business has long-term viability, owning your own premises can have many benefits.
Very few businesses can afford to buy a property outright. So you may need a commercial mortgage. To help you consider whether this is right for your business, check out our list of ups and downs.
Commercial mortgage advantages
- Extra income – you could potentially let or sublet the property to generate income to offset your mortgage repayments
- Cost control – a mortgage gives you greater control over costs compared with a rental agreement
- Tax-deductible – interest payments on a commercial mortgage are offset against corporation tax
- Security – the landlord won’t sell the property from under you, or move you out at the end of your lease
- Make it your own – you’ll own the property, so you’re free to carry out renovations and improvements without the need for a landlord’s permission
Commercial mortgage disadvantages
- Upfront costs – deposit, legal and survey fees require a lot of capital
- Lost capital – those costs represent capital that could have been used elsewhere in the business
- Risk of repossession – if you can’t keep up with repayments, the property could be repossessed
- Maintenance costs – you’ll be responsible for maintenance costs, and complying with health and safety, fire and other regulations
- Harder to relocate – selling a property is more complex than moving to a new rental
Buying a commercial property is typically a longer-term endeavour. Repayment periods extend from 10 years up to a maximum of 30 years. Some lenders offer commercial mortgages with shorter repayment periods – this is usually referred to as bridge finance.
Purchasing commercial property using your pension
Buying a commercial property through your pension fund can be tax efficient, but this comes with its own risks.
There are two varieties of investment regulated pension scheme used to buy commercial property – self-invested personal pension plans (SIPPs) and small self-administered schemes (SSAS). We can give you a high-level overview, but for further advice please contact an expert who can review your situation and provide tailored guidance.
What’s the difference between SSAS and SIPP?
A SSAS is a stand-alone trust, and every SSAS member is a trustee with equal say when it comes to decision making.
A SIPP involves a master trust or insurance contract with a provider where each member is joining a group scheme. The SIPP operator has final say on how the property investment is run. This is the most common choice when buying a commercial property using your pension.
How does a SIPP pay for your commercial property?
Generally, up to 50% of the property value can be borrowed. The property is then held by the SIPP and leased back to the business. You’ll pay a monthly fee to the SIPP operator for an agreed term to cover the amount borrowed. Beyond that term, you will then benefit from the rental income, and the capital appreciation of the asset.
What are the pros and cons?
Tax relief is available for contributions to registered pension schemes. So if you purchase a commercial property through a SIPP or SSAS, you’ll not pay any income tax on rent received or capital gains tax when you sell the property. And when it comes to inheritance tax, it won’t be included as part of your estate.
However, it does mean that your personal pension and your business finances are linked. So if things don’t work out with the business, life could get very complicated. And if the property does not increase in value then you might find that your investment doesn’t yield the returns you hoped for down the line.
Purchasing commercial property through your pension is complex and you need to make sure you fully understand how it works – you should seek independent financial advice before making a decision.
Other funding options to consider when buying commercial property include:
- Bridging or development finance – normally a short-term option for those who expect to clear the loan within 12 months. Because of the short turnaround it’s often more flexible than traditional lending options.
- Auction finance – used to secure quick funding for a property being auctioned. It’s essentially another form of bridging finance that can be arranged with quick turnaround.
- Mezzanine finance – a hybrid of debt and equity finance often used to top-up another loan. It normally appeals to those wishing to retain control but lower their own capital investment.
- Portfolio finance – for those who already have one property and want to expand. The borrowing is secured against more than one property, so you can often benefit from more favourable rates.
Access commercial property finance
Whether you are considering your first commercial property investment or are a seasoned property investor we can help.
Finpoint is free to use. We’re 100% transparent about fees and rates, and give you access to the UK’s largest panel of business lenders. We’re also 100% independent. Our only interest is in making sure you get the right funding option for your business need.
Want to know more? Speak to us about funding.