For many business owners, holding commercial property within a pension has made good financial sense.
A Self-Invested Personal Pension (SIPP) or Small Self-Administered Scheme (SSAS) might own the premises from which the family business operates, for example, with the business paying rent to the pension.
Until now, these arrangements could offer an Estate planning advantage because the pension wealth could pass to beneficiaries outside the member’s estate for inheritance tax (IHT) purposes.
From 6 April 2027, that position is changing.
Most unused pension funds and pension death benefits will be brought within an individual’s estate for IHT purposes. For those pensions with substantial commercial property, this raises some important questions, including how will the property be valued and how will the IHT be funded.
The answers may not always be what families expect.
What’s changing from April 2027?
For deaths on or after 6 April 2027, most unused pension funds and death benefits will be included when calculating the value of the deceased’s estate for IHT. This will be particularly relevant for families that have deliberately preserved pension wealth while drawing on other assets in retirement.
This does not mean pensions suddenly become unattractive, but the assumption that a pension should automatically be the last asset you spend in retirement deserves another look.
Why does commercial property create an added complication?
Unlike cash and listed investments which are relatively straight forward, establishing the value of a commercial property at death may be more difficult.
Consider a company Director whose SIPP owns the company’s trading premises. The property was purchased many years ago and has increased substantially in value. On the Director’s death post 6 April 2027, the value attributable to the premises will increase the value of the Director’s taxable estate.
What about Business Relief?
A business owner may reasonably believe that because their company occupies the property, and the company shares qualify for IHT Business Relief, the commercial property held within their pension should receive the same treatment. That will not necessarily be the case.
Business Relief depends on the nature and ownership of the relevant property and the statutory conditions being satisfied. Commercial property held as an investment in a SIPP, for example, does not automatically qualify simply because it is let to a trading business.
Indeed, businesses consisting wholly or mainly of dealing in land or buildings or making or holding investments are generally excluded from Business Relief.
This distinction could become increasingly important where a family has valuable trading company shares outside the pension and the company’s premises inside it. The IHT treatment of the two assets may be very different, despite both being closely connected to the same family business.
Liquidity could be the bigger problem
For some families, finding the cash to pay the IHT liability could the most difficult issue.
Imagine a SIPP worth £1.5 million, of which £1.2 million is represented by the premises occupied by the family company. The pension may have significant value but have relatively little cash available.
If that pension value contributes to an IHT liability on death, the family and personal representatives need to understand how the liability will be funded without creating unnecessary disruption to the continuing business.
Selling the property quickly may be commercially undesirable, particularly if the family business relies on it. Raising finance may take time. The pension scheme itself may also have other members whose interests need to be considered.
The property therefore needs to be viewed not just as an investment, but as part of the family’s wider succession and liquidity planning.
Should commercial property still be held in a pension?
There is no universal answer, and the forthcoming IHT changes should not prompt knee-jerk restructuring.
Commercial property can still sit very effectively within a SIPP or SSAS. The wider tax advantages, investment objectives, rental arrangements, financing position and retirement needs should be considered.
Moving a property out of a pension purely because the IHT rules are changing could itself have significant tax and financial consequences.
What has changed is the calculation, so for some families, retaining the property within the pension may remain entirely appropriate. For others, particularly those with substantial pension wealth alongside valuable business and personal assets, the new rules could change how they choose to fund retirement or structure longer-term succession.
The time to model the position is before 2027
Business owners with significant commercial property inside pensions have an opportunity to understand their position before the change arrives.
This means modelling what the estate could look like under the new regime.
- How much of your overall family wealth sits inside the pension?
- What is the commercial property realistically worth today?
- What other assets are likely to qualify for IHT reliefs?
- Is there sufficient liquidity to meet a future liability without selling strategically important assets?
- Does the way you currently draw income and capital in retirement still make sense once pensions are brought into the IHT calculation?
Those questions should be considered together, rather than in isolation.
How we can help
For families with significant business, property and pension wealth, inheritance tax planning is becoming increasingly interconnected.
HaysMac’s Private Client Tax team can work alongside your pension, investment and legal advisors to assess how the new rules could affect you and your family.
We can help model potential IHT exposure from April 2027, consider the interaction between pension assets and Business Relief, assess Estate liquidity and review whether your existing succession and retirement strategy remains appropriate.
If you hold commercial property within a SIPP or SSAS, particularly property occupied by your own or your family’s business, now is a good time to review the position.
The aim is not simply to minimise a future tax bill, but to make sure a change in the tax treatment of your pension does not create an unexpected problem for the business, the property or the family you intended it to benefit.
