Thousands of UK businesses are at risk as forthcoming inheritance tax charge on pensions threatens many UK businesses holding commercial premises, according to UK wealth management firm Evelyn Partners.
UK Chancellor Rachel Reeves announced in her first Budget last year that unspent pension assets would from April 2027 become subject to IHT and the reform currently dictates that the pension scheme must itself settle its share of the IHT bill.
With many business founders and owners holding their commercial property in their pensions, the new IHT charge could force a sale of premises or plant, of the business itself or even its closure as a going concern, if the pensions rule change goes ahead as planned in April 2027, Evelyn point.
Gary Smith, financial planning partner and retirement specialist, Evelyn Partners, said: ‘This could be a serious problem for thousands of [UK] small and medium-sized businesses that is currently flying under the radar, probably because it’s not widely understood.Together with the host of tax and cost pressures on entrepreneurs and family businesses at the moment, owners and directors who don’t take advice or make preparations could fall foul of the new IHT charge – with the end result in some cases that their businesses are liquidated and jobs lost.
SIPPs and SASSs
Smith points that business founders and owners in certain circumstances have for many years been advised to hold their commercial property, like business plant or premises, in their Self-Invested Personal Pension (SIPP) or a Small Self-Administered Scheme (SSAS). Under existing arrangements they could expect to live off rental income from their tenant (often their own business) in retirement via their pension and then pass on assets held in that pension tax efficiently to their beneficiaries on death, along with the firm itself, ensuring business continuity.
However, with the changes coming in from 2027, on the death of the business owner, the business could face the prospect of a disruptive fire sale of their premises to meet a tax bill that could even jeopardise the survival of the firm.
“Under current government proposals, the IHT bill will have to be settled by the pension scheme itself, not from the overall estate, which is going to be very problematic when it comes to illiquid assets such as a commercial property, particularly in the tight timescale of six months that HM Revenue & Customs demands for IHT settlement,” Smith added.
Evelyn add that alongside the new cap on Business Relief, higher capital gains tax, employer National Insurance hikes, a big jump in the minimum wage and the new employee rights legislation, this is just one more blow to entrepreneurs and small and medium-sized businesses.
Andy King, pensions technical specialist at Evelyn Partners, said that he had discussions with HMRC during the consultation process on the Chancellor’s Budget IHT reforms, estimates that business owners with commercial property in their pensions could number ‘at least 15,000’, if not tens of thousands.
“While some of the pensions that own a commercial property might have enough liquid assets in the scheme to settle an IHT bill at death, many will not, and it seems awareness of this issue among the authorities is limited. The danger is that it is dismissed as a minor headache affecting a few business owners, when in fact – as the suggested implementation of the Budget reform stands – it could be something much wider and more damaging to family businesses, jobs and local communities.”
As a result Evelyn point that one remediation would be for “the rules to be amended so that the pensions portion of IHT bills (which comes into effect from April 2027) does not have to be settled by the pension scheme itself, but rather could be settled by the overall estate”.
Financial planner
“It’s essential that those who currently have this strategy in place or are considering implementing it, talk with their financial planner or wealth manager to discuss the possible implications of the scheduled IHT reforms,” Smith added.
“We have one case where there are four directors of a company, they currently rent their premises from a third party. But they see this as wasteful, as money was leaving the business, and so they have decided to use their pension funds to buy a new commercial property for the business and the rent that the business pays will go into their pensions. That rent does not take up any annual allowance and pension schemes can borrow up to 50% of their value to enable a property purchase.
“While the property is in the pension, it doesn’t attract CGT so appreciation is tax free, so we can see the various incentives to use this strategy.
Smith added that another retired client owns a commercial property in their pension worth £1.2m, on which the business tenant pays £100,000 rent a year into the pension for the use of that property. The client and their spouse use that annual sum to drawdown and live off. If the Chancellor’s IHT proposals are adopted as proposed then after April 2027, on the death of that individual the pension scheme could owe as much as £480,000 in IHT – but all the pension scheme owns is a property worth £1.2m.
“So what happens then?,” he said. “Will the pension scheme be able to borrow money to pay the tax bill, or will the business have to borrow money to buy the property, at high interest rates, and put cash in the pension scheme instead? Will the estate be forced to sell the commercial property? Or does the retiree have to stop drawing down the £100,000 a year they planned to live off to build up liquidity to pay a future IHT bill instead and in so doing expand the IHT liability?”
