Commercial property in pensions and IHT reform: considerations for legal advisers

The proposed Inheritance Tax (IHT) changes due to take effect from 6 April 2027 are prompting many advisers to revisit long-established estate planning assumptions.

At the start of the next tax year, unused pension funds and certain death benefits are expected to be brought within an individual's estate for IHT purposes, ending the longstanding position whereby pension assets sat outside the IHT regime.

While much of the discussion has focused on wider estate planning and the inclusion of death benefits within an individual’s estate, there is a potentially significant consequence for those who hold commercial property or land within pension arrangements such as Self-Invested Personal Pensions (SIPPs) and Small Self-Administered Schemes (SSASs).

For private client lawyers, agricultural specialists and commercial property practitioners, pension-held property may become an increasingly important area of review when advising clients on succession planning, estate structuring and wealth preservation.

A planning structure ‘outside of the estate’

Traditionally, holding commercial property or land within a pension scheme has long formed part of many clients' financial and business planning arrangements.

Most common scenarios include:

• Business premises owned by the pension scheme and leased back to the trading company
• Commercial property let to third parties by a pension scheme
• Where a pension scheme acquires agricultural land to sell with development potential

Rental income received within a pension is generally free of income tax and growth is free from Capital Gains Tax. These benefits remain in place, however the IHT reforms could significantly alter an individual’s estate planning position.

A potential loss of reliefs

The interaction between pension-held assets and IHT reliefs that would otherwise be available if the assets were owned directly, requires particular attention.

Agricultural Property Relief (APR) and Business Property Relief (BPR) are not be available where land and commercial property are held within a pension. As a result, when pension assets are brought into the scope of IHT from April 2027, this will create the possibility that land and commercial property that would benefit from relief if personally owned may be exposed to a different IHT outcome when held within a pension scheme.

For clients with significant agricultural land holdings, trading premises or other property assets within pension arrangements, this distinction could become increasingly important.

Considerations for legal advisers

The incoming reforms create a number of considerations for those advising clients on estate and succession planning. When reviewing a client’s affairs, it will be important to establish:

• whether any commercial property or land is held within a pension arrangement
• whether the underlying asset would otherwise qualify for APR or BPR
• whether the pension structure remains aligned with the client's succession and estate planning objectives
• whether alternative ownership structures merit consideration
• whether sufficient liquidity would be available to meet any future IHT liability

Opportunity to review

The upcoming reforms do not mean property should no longer be held within pension schemes. In many circumstances, SIPPs and SSASs will continue to provide significant planning and commercial benefits.

However, for clients with substantial land or commercial property holdings within pension arrangements, the period before April 2027 provides an opportunity to reassess whether existing structures continue to support both retirement and estate planning objectives.