Covid-19 and many other factors have combined to create a perfect storm which has – but, as we all know, every cloud has a silver lining.
Inflation’s corrosive impact has become increasingly apparent, prompting the Bank of England to increase interest rates which, according to the latest Fitch Ratings report (November 2022), are expected to veer close to their longer-term ‘neutral’ rate of 5%. The organisation expects the Bank of England to raise base rates to 4.75% by the end of the second quarter of 2023.
Against such a backdrop, the pandemic’s undermining affect upon commercial property values has been striking – and rising interest rates will continue to exert downward pressure across the sector. It is here that increasingly advantageous investment opportunities will continue to present themselves to company directors who could be in a position to jettison existing rental overheads by acquiring commercial premises, thereby strengthening their business’s balance sheets. This can be facilitated through a SSAS, a ‘Small, Self-Administered [Pension] Scheme’.
Christine Hallett, Managing Director of Options UK, the independent pensions provider, says that
“SSAS were originally introduced in 1973 and while they’ve tended to operate in the shadow of the better-known SIPP pension platform, the range of investments available in a SSAS is broader than any comparable pension scheme.”
Highlighting some of the advantages of a SSAS, Ms Hallett notes that the platform
“combines several tax advantages. For example, tax relief is given on contributions and income, while capital gains and inheritance tax exemptions also apply.”
Before outlining how SSAS can work in company directors’ favour, however, let us first consider the medium-term prospects for the UK’s commercial property sector.
As a visit to any town centre will confirm, retail stores and shopping centres have suffered significant fallout from the pandemic. While online retail sales have soared, a much-reduced footfall in every town and city in the country has further depressed the value of ‘bricks and mortar’ retail outlets. Visual evidence is readily supplemented by the underwhelming share price performance of the publicly quoted property sector.
In the wake of a damaging trio of factors: the pandemic, rising interest rates and rampant inflation, many firms have called a halt to expansion plans, further depressing demand for additional commercial space – of which there is currently a colossal over-supply.
According to property data firm CoStar, at the end of September there was 31 million square foot of vacant office space in London alone, the direct consequence of a shift in working patterns. What was once a short-term phenomenon, working from home has become the norm for millions of workers.
This UK-wide exodus from the workplace has made life difficult for commercial property owners who, to attract new occupiers or retain existing tenants, must now offer incentives such as longer rent-free periods, full fit-outs of premises or shorter lease lengths. According to BNP Paribas real estate, in 2013, average commercial leases ran for 11.6 years; today, the average is 6.4 years.
If the situation was not gloomy enough for commercial property landlords, on 1st April 2023, all commercial properties will be re-assessed for business rates based upon rental values as of 1st April 2021.
Current rateable values are based upon rental values established as of 1st April 2015, so while rents passing in 2021 were likely to be lower than in, say, 2019-20, they’re almost certainly higher than they were in 2015, meaning higher rateable values will do little to boost commercial property values.
For good measure, the possibility of a global recession cannot be discounted, which means this combination of extraordinary economic factors are likely to exert significant downward pressure on values, effectively creating opportunities for company directors to profit.
The SSAS is intended to fund company directors’ retirement with the directors given control over how the fund is invested. Ordinarily, business owners have used their SSAS to invest in commercial property, particularly their existing premises, but such has been the shift in the commercial property sector, it’s probable that equally attractive real estate opportunities exist for SSAS members.
Moreover, a SSAS can borrow money*, usually by raising a mortgage to assist with the purchase of existing or new company premises. Mortgage repayments are covered by the rent paid by the company to the SSAS, so reducing its taxable profits. Furthermore, the SSAS is not ordinarily liable for tax on income generated by the investment; nor is it liable for capital gains tax.
Further leverage can be achieved because a SSAS pension may comprise up to 12 directors, each of whom can either transfer in funds from an existing pension or contribute to what becomes a single pooled pension, subject to only one set of fees, a huge benefit of SSAS.
While buying residential property through a SSAS is effectively prohibited, it is possible to make a business loan from the pension to the limited company, an arrangement known as a SSAS Loanback.
The loan can be used for a variety of legitimate business purposes to acquire additional assets, thus further strengthening the company’s balance sheet.
*A SSAS property pension can borrow 50% of the combined value of all director pensions as a mortgage.