How will Inheritance Tax changes effect SSAS schemes from April 2027?

Reading time: 7 minutes

Small Self-Administered Schemes (SSAS) continue to retain their popularity as a powerful vehicle for owner-managed businesses to buy commercial property through their pension, keeping both rental income and growth outside of their personal estate. However, from 6 April 2027, any unused pension funds will be brought within the value of the member’s estate for Inheritance Tax (IHT), so a SSAS can no longer be relied on to keep pension wealth outside of the scope of IHT entirely – unless the death benefits can be nominated to a spouse or civil partner.

Below, our case study takes a deep dive into how two directors of an IT consultancy company, Jo and Brian, used a SSAS to buy their business premises, and it sets out what still works for estate planning, and what will change once the new IHT rules come into effect from 6 April 2027.

Jo and Brian’s business situation:

Jo and Brian have been running their IT consultancy limited company business very successfully for many years. As their business and employee headcount kept growing, their home-office extension could no longer suffice, and they sourced a modern office at a nearby business park costing £285,000. As Jo and Brian’s business was profitable with substantial cash reserves and their operating overheads being relatively low, they were able to extract profits from the business in the form of substantial annual dividends. Their company was in fact cash-generative enough to buy the building outright, but they wanted to explore alternative structures to fund it.

However, Jo and Brian were becoming increasingly conscious that their continued success was creating a potential IHT problem. With a couple of teenage children to think about, they sought advice from both their Accountant, Phil, and their financial planner, Marie.

The basics: what is a SSAS?

A SSAS is an Occupational Pension Scheme (OPS) usually set up by company directors or business owners of a limited company. It acts as a tax-efficient pension wrapper that can hold investments for up to 11 members due to its multi-member structure. A SSAS can directly own commercial property – such as a business premises, office, or warehouse – with the SSAS trustees also being able to make loans to the sponsoring employer (subject to the strict conditions laid down by HMRC).

Jo and Brian had an Executive Pension Plan scheme (EPP) worth £100,000. Marie advised that if they were to convert their existing EPP into a SSAS, such a mechanism simply widened the investment powers available to the trustees and enabled the direct purchase of the commercial property. It also added an advantage of avoiding the need for a new SSAS to be registered, which in turn speeded-up the property purchase process.

The three routes to fund the office purchase

Working hand in hand with Phil and Marie, Jo and Brian discuss three options:

Company purchase: Jo and Brian’s business buys the property directly using its cash reserves

1. Personal purchase: Jo and Brian buy the property as individuals and lease it to the company

2. Pension purchase through a SSAS: Jo and Brian would open a SSAS, buy the property through the SSAS and lease it to the company.

A key factor was the fact that their teenage children were likely to join the business in the near future, and they really liked the idea of being able to pass the property down a generation as tax-efficiently as possible.

Why did Jo and Brian chose the SSAS route?

Two factors steered Jo and Brian towards a SSAS purchase:

1. How additional personal wealth would be taxed on their Estates and;

2. How tax-efficiently they could extract cash from the business.

Jo and Brian had realised that once paid into their personal bank accounts, the dividends became part of their personal wealth for IHT calculation purposes, and they had already amassed enough wealth each to breach the nil-rate band for IHT.

The idea of accumulating additional wealth outside of their Estate through a SSAS was very attractive to them, particularly considering that member and employer contributions were very tax efficient in themselves. They also accepted that the scope for member contributions was limited because of their focus on dividends to keep their salaries low as part of wider tax planning in place.

How did Jo and Brian’s SSAS purchase work?

1. The EPP was converted into a SSAS, widening Jo and Brian’s pension scheme investment powers to allow a direct commercial property purchase

2. Their limited company made an employer contribution of £220,000 into the SSAS, utilising unused Annual Allowance carried forward from previous years plus the current year’s Annual Allowance.

3. As trustees of the SSAS, Jo and Brian used the cash held within the SSAS trustee bank account (£220,000 employer contribution plus the existing £100,000 EPP fund) to buy the £285,000 office outright.

4. The SSAS then leased the office back to Jo and Brian’s limited company at a RICS Registered Valuer’s confirmed annual rent of £21,375, representing a 7.5% annual yield on the purchase price.

Jo and Brian’s SSAS commercial property purchase at a glance:

What were the financial benefits of doing the commercial property purchase through a SSAS?

Jo and Brian choosing to do a commercial property purchase through a SSAS gave several advantages, compared to the routes of a personal or company purchase.

1. Reduction in Corporation Tax liability: the £220,000 employer contribution that their company made was treated as a business expense through the company’s Profit and Loss Account (P&L) – substantially reducing its Corporation Tax liability without it adding to their personal wealth

2. Tax-free rental income growth: the office’s £21,375 annual rent is received into the SSAS bank account free from income tax, in turn growing the SSAS for retirement. The additional IHT liability on their estates would have been £8,550 (40% of £21,375) for each year they held the property personally

3. Rental income stays outside of Jo and Brian’s estate during their lifetime: as the £21,375 annual rental income is paid into the SSAS, it was not inflating the value of their personal wealth as it would have done if they had personally bought the property and leased it to their business. However, from 6 April 2027, the entire SSAS fund is brought into the scope of IHT, but benefitting from the spouse / civil partner exemption as noted above.

What circumstances change for Jo and Brian from 6 April 2027?

Jo and Brian do not need to sell the office, and their children can still inherit it – whether through death benefit entitlement or by becoming members of the SSAS as they are intending on joining the business anyway. The forthcoming change is that pension scheme death benefits might no longer be free from IHT, depending upon who the nominated beneficiaries are.

Spousal inheritance:

If either Jo or Brian dies first, and nominate each other as beneficiaries, the SSAS fund can pass to the surviving spouse free of IHT, as payments to a spouse or civil partner will be exempt from IHT. Whether it would be free from Income Tax depends on age of death, as it would generally only be free of Income Tax if death occurs before the member’s 75th birthday. An IHT – and possible Income Tax charge – might arise on the second death.

If pension scheme death benefits are not nominated to a spouse or civil partner, the value of these will be added to the deceased’s non-pension wealth and IHT might be applicable.

Frequently Asked Questions (FAQs):

Can a pension scheme buy commercial property?

Member-directed pension schemes such as SIPP and SSAS can buy commercial property, provided that it conforms to HMRC’s requirements. If the property or aspects of it (such as residential elements) do not comply with HMRC’s requirements, tax charges can occur.

What is the difference between an EPP and a SSAS?

An Executive Pension Plan (EPP) is a Registered Pension Scheme which typically has fewer investment options than a SSAS. Usually, the investment options within an EPP are limited to a life company’s own managed investment fund range, whereas the range of possible investments within a SSAS can be substantial.

Does rent paid to a SSAS count as personal income?

Rent paid into a SSAS bank account does not count as personal income; it is an investment return for the pension scheme and remains in the pension scheme for investment purposes. Only when income is drawn out of the pension scheme by the member as retirement benefits will it count as personal income for the member.

Is pension property still free of Inheritance Tax on/after 6 April 2027?

Commercial property owned by a pension scheme is treated the same as any other asset within the scheme. The question of whether any pension scheme assets will be subject to Inheritance Tax (IHT) from 6 April 2027 will depend on who the beneficiary is. If nominated to a spouse or civil partner, pension scheme death benefits will be exempt from IHT.

Will Jo and Brian's children still get to inherit the office?

If Jo and Brian’s children are the nominated beneficiaries (“nominees”) for death benefits from the scheme, they could inherit the office, although the death benefits will be within scope of IHT because they have not been nominated to a spouse / civil partner. They might have the option of retaining the office in the pension scheme and drawing down death benefits as and when they would like to. Alternatively, the office could be sold to create cash with which to pay benefits (and potentially, the scheme’s share of an IHT liability). A third option could be to have the office moved out of the scheme into their own individual ownership as an “in-specie” benefit payment.

Stephen McPhillips, Technical Sales Director, Dentons Pension Management Limited