Buying the freehold of a dental practice through a pension can be an extremely tax efficient route. For dentists with a secure guaranteed NHS pension scheme you can’t access those assets until 55. However for those with private pensions although the age to access the money is the same, there’s a lot that you can do in the meantime.
A well-implemented pension scheme can also provide the opportunity for a dentist to control their future now, managing a portfolio of investments or even buying property.
Pensions are not the first thought in many investor’s minds when they think of purchasing property. When it comes to taking the plunge and securing your own practice, practitioners either buy the freehold or simply lease the premises.
Arguably, there has never been a better time for practitioners to enter into the acquisition of commercial property. The financial sector is looking favourably on the dental market, whilst the NHS contract helps practitioners secure a more regular monthly income stream.
Buying the freehold directly though is only one of the options. Many practitioners are choosing to explore another option: purchasing the property through a personal pension scheme.
Whilst not for everyone, there are some definite advantages to choosing to purchase commercial property through a self-invested pension plan (SIPP):
• The purchaser avoids paying Capital Gains Tax (CGT) on the sale of the property. Although the rate of CGT has been reduced, this is still a tax worth saving and there’s every possibility this will be raised at some point in the future, to bring it into line with the highest rate of tax at 45%.
• The pension fund can borrow against the security of the property. Many practitioners are able to purchase a freehold property with 100% finance, as lenders consider the profession to be a reliable ‘safe lend’. However, if a traditional mortgage is not available, for those who need to find a deposit before being able to access the capital, drawing from a pension fund can be an ideal solution.
• VAT can be reclaimed if the property is VAT registered.
As well as the obvious benefits of this opportunity, it is also wise to point out the potential downfalls. Most pension funds are implemented for good reason, and the assets are usually invested with a fair degree of diversification often combining a range of financial options, including stocks and shares, bonds as well as cash, therefore. So investing wholly in just one asset class - commercial property - is considered to be a relatively high-risk strategy.
Another disadvantage is that a SIPP containing a property is usually considerably more expensive to run. It’s also worth point out that technically the investor does not own the property, it is owned by the pension fund/trustees and any rental income or capital receipts from the sale of the property can not be removed from the fund until retirement age is reached – the minimum retirement age is now 55.
Before making a decision on the most appropriate way to purchase a property, it is advisable to seek professional advice – there are many pitfalls that can befall a practitioner when taking this big step, and professional assistance from the outset can save thousands of pounds, as well as hours of time! The Essential Money team are on hand to ensure the process of practice purchase as painless as possible.