With significant changes to inheritance tax on the horizon, anyone with commercial property invested in SSASs (Small Self-Administered Schemes) or SIPPs (Self-Invested Pension Plans) should seek legal and financial advice now. It’s important to explore your options before the rules change.
In the Autumn Budget of 2024, the Government announced plans to include unused pension funds in the estate of a deceased person for inheritance tax purposes.
At present, pension funds—including commercial property in SSASs and SIPPs—are not considered part of the estate for inheritance tax (IHT) purposes when someone dies. Any growth in property value, as well as income or capital passed on to beneficiaries, is typically exempt from IHT. But all of this is set to change from April 2027.
Aaron Cane, Executive Partner for Real Estate at Tees, explains that while the changes are straightforward, their impact will be significant.
“At the moment, pensions sit outside of the estate on death, and SSASs and SIPPs have been an extremely tax-efficient way to hold commercial property. From April 2027, though, these assets will be included in the estate for inheritance tax purposes, potentially subject to a 40% tax,” he says.
Compounding the tax burden
James Appleby, Managing Director at Tees Wealth, points out that the tax burden doesn’t stop with inheritance tax. Beneficiaries of SSAS or SIPP assets could also face income tax charges.
“One of the things we’re focusing on is the potential for double taxation. After the death of a pension holder over the age of 75, in addition to the 40% inheritance tax, there could also be an income tax charge for beneficiaries,” he explains.
Right now, if you pass away before the age of 75, your beneficiaries can inherit pension funds tax-free. However, if you die after 75, any payments made to your beneficiaries are subject to income tax at their highest marginal rate.
After April 2027, if you pass away after 75, your SSAS or SIPP, including the commercial property, could face 40% inheritance tax and then be taxed again at up to 45% in income tax when paid out to beneficiaries. This double tax burden could result in a total tax charge of up to 67%.
Remedies
One potential remedy is to ask the pension trustees to sell the commercial property held within the SSAS or SIPP—typically to the business or individual holding the pension. However, this must be done as an arm’s length transaction at full market value. Failing to meet this requirement could trigger a 55% tax charge on the value of the pension.
In this scenario, with property moving out of the SSAS or SIPP and cash moving in, you’ll need financial advice on where to invest that cash within the pension, in addition to legal advice on the commercial conveyancing transaction.
What action should you take now?
Every client’s situation is different, and pension and estate planning is complex. Mistakes can be costly. This is where the team at Tees can help. Working together, our in-house independent financial advisers and commercial property lawyers will review your situation, explain your options, and help you put in place a strategy that works for you, your family, and your business.
We’ll evaluate the structure and tax treatment of your SSAS or SIPP-held commercial property and model different scenarios for drawdown, retention, and disposal.
You may also want to review your will and ensure your pension nomination reflects your wishes. While not legally binding, your pension nomination provides your beneficiaries with more choice in how they receive the funds, which could help reduce tax exposure.
Act now: the clock is ticking
Although the changes won’t take effect until April 2027, James Appleby stresses the importance of taking action now.
“If you wait too long, there’s the risk it won’t be done in time. The clock is ticking. If you want to get things in place before April 2027, it’s best to start sooner rather than later,” he says.
Aaron Cane agrees:
“Conveyancing and the sale of property take time. If SSAS or SIPP providers become inundated with transfer requests, delays are inevitable. We anticipate that the lead time will increase as we get closer to April 2027,” he says.
If you hold commercial property in a SSAS or SIPP, now is the time to speak to our wealth team or legal advisers. Together, we’ll review your estate planning strategy and provide the most efficient solution for your situation.
Disclaimer: This material is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It should not be relied upon for accounting, legal, or tax advice or investment recommendations.
Tees is a trading name of Tees Financial Limited, which is authorised and regulated by the Financial Conduct Authority (FCA), registered number 211314. Tees Financial Limited is registered in England and Wales, company number 4342506.
Tees is also a trading name of Stanley Tee LLP, a Limited Liability Partnership registered in England and Wales (number OC327874), regulated by the Solicitors Regulation Authority (SRA number 464615).
