Holding your business premises within a SIPP or SSAS has long been an attractive strategy for business owners. But the inheritance tax changes coming in April 2027 mean some owners should reconsider whether it remains the best home for their commercial property.

For many years, buying business premises through a pension has made considerable sense. A business might pay rent to the pension rather than an external landlord, and that rental income is generally received tax-free, while any increase in the property’s value can usually be sheltered from capital gains tax within the pension. For the right business owner, it can be an extremely effective arrangement.

But from 6 April 2027, another tax needs to be added to the equation: inheritance tax. Most unused pension funds and death benefits are due to be brought within the estate for inheritance tax purposes. That doesn’t suddenly make commercial property a bad pension investment, but it does change the calculation.

The problem with an illiquid pension

Imagine a business owner has a £1.5 million SIPP or SSAS. Rather than holding £1.5 million in investment funds, most of the pension consists of the factory, warehouse or offices occupied by their own company. The company pays rent to the pension, and everything works perfectly well — until the owner dies.

For some businesses, particularly those heavily dependent on their founder, the company may not survive them. It might close altogether, or its future may become uncertain very quickly. Suddenly, the pension’s position looks very different: the tenant paying its rent has disappeared, and the pension is left holding an empty commercial property. Business rates, insurance, maintenance and other costs may start eating into the pension’s remaining cash, and from April 2027 there could also be an inheritance tax liability to deal with.

Where does the money come from?

This is the question I think business owners with property-heavy pensions now need to consider. If you died tomorrow, your business stopped paying rent and inheritance tax became payable on your pension, where would the cash come from?

A pension invested in conventional shares and funds can normally sell some investments to raise money, but you cannot sell 20% of a factory quite so easily. The pension trustees might therefore need to sell the property itself — and selling commercial property can take time. If the previous tenant has disappeared and costs are accumulating while inheritance tax remains outstanding, the trustees may also find themselves under increasing pressure to accept a sale rather than wait indefinitely for the ideal buyer. What was supposed to be a long-term pension investment could effectively become a forced sale.

And there is another sting in the tail

Normally, inheritance tax legislation contains some useful protections where assets are difficult to sell or subsequently fall in value. For example, subject to the relevant conditions, land sold within four years of death for less than its value at death can qualify for inheritance tax loss-on-sale relief. However, HMRC has specifically confirmed that this relief will not apply to the “notional pension property” being brought within someone’s estate under the new pension rules. HMRC has also confirmed that the normal facility allowing inheritance tax on certain qualifying assets to be paid by ten annual instalments will not apply to notional pension property.

That distinction matters. A commercial property might be valued at one figure immediately before the owner’s death, while their successful business is occupying it and paying rent. If the business subsequently closes, though, the pension may eventually have to sell a vacant property in very different circumstances — and if it ultimately achieves substantially less than expected, the pension won’t get the normal IHT loss-on-sale protection simply because the underlying asset happens to be commercial property. Meanwhile, interest may be accruing on the unpaid inheritance tax. That combination creates a risk that simply didn’t exist under the previous pension IHT regime.

Unmarried business owners should pay particular attention

The position deserves particular attention from business owners who are neither married nor in a civil partnership. Transfers between spouses and civil partners can generally benefit from the inheritance tax spouse exemption, including under the new pension rules, but long-term unmarried partners do not receive the same treatment. That means an unmarried business owner could potentially encounter this problem on the first death, rather than the tax position being deferred through a spouse or civil partner exemption. For someone with a substantial property-owning SIPP or SSAS, that distinction could be significant.

Does this mean you should take your property out of your pension?

No. Tax planning rarely benefits from knee-jerk reactions, and moving an existing commercial property out of a pension can itself have significant tax, transaction and financing consequences. There may also remain excellent reasons for the pension to own the property. Instead, the important point is that the calculation has changed.

Historically, somebody considering where their business premises should be owned might have concentrated heavily on income tax, corporation tax, capital gains tax and pension tax advantages. From April 2027, that assessment also needs to consider inheritance tax, liquidity and what happens to both the business and the property when the owner dies. For some people, pension ownership will still come out on top; for others, alternative ownership structures may deserve greater consideration.

Stress-test the strategy

At Rowley Turton, we believe financial planning should consider what happens when things don’t go according to plan, rather than simply identifying the most tax-efficient arrangement today. For a business owner with commercial property inside a pension, some useful questions now include:

• How much of the pension is represented by the property?
• How much liquid cash or other investments does the pension hold?
• Would the business survive the owner’s death?
• If it did not, how quickly would the rent stop?
• Who would pay the property’s ongoing costs?
• How readily could the property be sold or re-let?
• Where would the money come from to meet an inheritance tax liability?
• Is the owner married or in a civil partnership?
• And, taking the new IHT regime into account, is the pension still the best place to own the property?

These aren’t necessarily questions that require immediate action, but they do require an answer.

April 2027 could be a game changer

Commercial property has not suddenly become unsuitable for pensions, and SIPPs and SSASs can still provide an extremely useful way for business owners to own their trading premises. But April 2027 is a potential game changer, especially for anyone unmarried.

Business owners should now compare pension ownership against alternatives such as personal, company or other structures, taking account not just of income tax and capital gains tax, but also inheritance tax, liquidity and what happens on death. The answer will differ from case to case, but the days of assuming that “property in the pension is best” may be over.

Frequently Asked Questions (FAQs)

Does inheritance tax apply to commercial property held in a SIPP or SSAS from April 2027?

From 6 April 2027, most unused pension funds and death benefits are due to be included within an individual’s estate for inheritance tax. Where a SIPP or SSAS owns commercial property, its value can therefore contribute to the pension value included in the IHT calculation.

What happens if my pension owns the premises occupied by my business?

This can create a particular liquidity risk. If the owner dies and the business subsequently closes, rental payments to the pension could stop while the pension remains responsible for an illiquid commercial property and its associated costs. An inheritance tax liability could arise at the same time.

Does IHT loss-on-sale relief apply if pension property is subsequently sold for less?

HMRC has confirmed that the normal inheritance tax loss-on-sale relief will not apply to notional pension property under the new rules. This means a subsequent fall in the value realised from an underlying commercial property may not produce the IHT adjustment that could potentially apply where land was owned directly.

Are unmarried business owners particularly affected?

Potentially. Transfers to a spouse or civil partner can benefit from the IHT spouse exemption, whereas an unmarried partner does not receive the same exemption. The individual’s complete estate and pension position therefore needs to be considered.