There are about 5.5m SMEs in the UK, of which 69% own their properties. Yet, just 3% of them hold them in a Sipp or SSAS.
That may sound like a niche. But I’d like to suggest that it’s more like a huge missed opportunity sitting right under the noses of SMEs – the UK’s great unclaimed estates, as it were.
The fact is, most small-to-medium businesses need premises, whether industrial, retail, or office space.
Self Invested Personal Pensions (Sipps) and Small Self-Administered Schemes (SSASs) still offer some of the most tax-efficient ownership solutions for this practical and indeed primary need.
Property has always been a tax-attracting asset. Long before Sipps existed, SMEs were using SSAS structures to hold business premises, and it remains true today that pensions are one of the most efficient vehicles for this purpose.
Right now, though, the negative narrative around IHT has everyone twitchy about this sort of stuff.
But advisers have a responsibility here. Cool heads need to prevail, and that’s exactly when advisers should be earning their corn. That certainly doesn’t mean leaving billions in potential tax efficiency on the table.
Why IHT is a red herring
Let’s address the whole IHT issue first. We’d do well to remember that before pension freedoms in 2015, pensions were already subject to a death tax, albeit under another guise.
Sipps and SSASs still deliver powerful capital gains tax (CGT) and income tax exemptions that are very attractive
So, the death tax concept isn’t particularly ‘new’ – it’s a return to a historical norm, if anything.
And even if the IHT advantage is no more, advisers must not throw the baby out with the bath water. Sipps and SSASs still deliver powerful capital gains tax (CGT) and income tax exemptions that are very attractive.
Liquidity issues are manageable with planning; and, moreover, liquidity can be created inside the pension itself through rental income from the property, etc. (Plus, those inflows not only build value within the pension but also reduce the company’s corporation tax bill).
They also provide smart solutions for succession planning. Firstly, executors have six months to settle any liability, which can be paid from available estate funds.
But also, succession planning funded by pension contributions offers a neat alternative to gifting or being forced to sell the premises to a third party. And for many SME owners, those premises aren’t just bricks and mortar, they’re tied up with identity, legacy, and family.
Which is all to say that even at the points where IHT might directly impact clients, there’s still planning opportunities.
Playing the property card
For SMEs, the logic is straightforward.
Hold the business premises inside a pension. Rental payments flow into the scheme, growing retirement savings. The company offsets the rent against corporation tax. And the asset sits in a protected, tax-advantaged wrapper.
Sipps and SSAS can get a mortgage to fund the purchase of business premises on a separate line of credit not linked to the business
These, after all, are high-value, high-yielding assets held for the long term, naturally maximising the benefits of being inside a pension.
Furthermore, the advantages aren’t limited to tax breaks. SIPPs and SSAS can get a mortgage to fund the purchase of business premises on a separate line of credit not linked to the business. That could be game-changing for SMEs that want to invest without becoming over-leveraged.
Finally, in the worst-case scenario – i.e., if the business fails – then the property remains protected from creditors.
And yet, I repeat: only 3% of SMEs are using this solution. Isn’t that starting to sound like a huge missed opportunity to you, too?
Efficiency, not avoidance
By now, we’ve all heard Torsten Bell trying to paint pensions planning as a form of tax dodging. Let’s push back; and push back strongly.
It’s not glib rationalisation to assert that advisers using, for example, SIPPs and SSASs to hold property in pensions aren’t engaged in avoidance. They are simply applying long-standing, HMRC-approved methods to help businesses and families operate more efficiently.
And it’s equally important to point out that in today’s high-tax environment, SMEs need to utilise all the efficiencies at their disposal. Dismissing that as avoidance is not only wrong, but also an insult to the small-to-medium engines that drive the UK economy.
Isn’t government meant to be encouraging those very businesses and entrepreneurs?
It’s time for advisers to help SMEs claim what’s theirs
I’m going to risk putting noses out of joint here, but nevertheless: for advisers to say “I don’t do property” just isn’t on. It’s simply not compatible with truly addressing the needs of this cohort.
Millions of SMEs own premises, but only a sliver benefit from the obvious and numerous efficiencies of holding them in pensions
The numbers are stark: millions of SMEs own premises, but only a sliver benefit from the obvious and numerous efficiencies of holding them in pensions. Advisers who ignore this are failing their clients.
So, stop obsessing over IHT. Start talking about property. The UK’s SMEs are sitting on unclaimed estates. It’s time advisers helped them claim them.
Matt Storey is head of business development at @sipp
