What does inheritance tax reform mean for land and commercial property held in pensions?

For many business owners and investors, holding commercial property or land within a pension scheme has been an effective long-term planning strategy.

It is common to hold commercial properties and land in a pension wrapper, typically a Self-Invested Personal Pension (SIPP) or a Small Self-Administered Scheme (SSAS), as they provide valuable tax advantages. While many of those benefits remain very attractive and largely unchanged, one significant benefit will change at the turn of the next tax year.

From April 2027, changes to the Inheritance Tax (IHT) treatment of pensions mean that if you hold commercial property or land held in pension arrangements, you may need to review whether your existing structure remains the most appropriate.

Why do people hold land and commercial property in pensions?

There are a number of scenarios why land and commercial property are held in pensions, but the three most common are:

1. Business premises owned by the pension scheme

A pension scheme may purchase the trading premises used by the member’s business. Business owners can use their accrued pension assets (rather than a loan or working capital) to purchase the property. The pension scheme rents the property to the business at a commercial rate, providing an income stream to the pension while allowing both the rent and any growth in the property value to accumulate free of income tax or Capital Gains Tax (CGT).

2. Commercial property let to third parties

Some pension schemes acquire commercial property as an investment and lease it to unconnected tenants. It may have been bought specifically for this purpose or perhaps vacated by the members' own business. Again, the pension scheme benefits from the rent and the tax-free growth.

3. Agricultural land with development potential

Agricultural land is purchased by the pension scheme at market value, often from the member personally. Once the land is in the pension scheme, planning permission is sought, and, if successful, the land can be sold to a developer for a higher price. Pension schemes generally do not pay CGT, so the full uplift is received by the pension scheme.

All of the benefits and rationale outlined above remain in place and should be considered as valuable and tangible planning reasons.

What is changing?

Pension assets and death benefits will fall into an individual’s estate for IHT purposes from 6 April 2027, which will impact most pensions.

If you hold land or commercial property in a pension scheme, this introduces an additional layer of complexity.

The key issue is that Agricultural Property Relief (APR) and Business Property Relief (BPR) are not available where land or commercial property is held inside a pension.

As a result, when pension assets are brought into the scope of IHT from April 2027, land and commercial property held within a pension could face an IHT charge without access to reliefs that may have been available had the assets been owned personally.

As a result, you may need to consider:

•  Would the property qualify for APR or BPR if it were owned outside the pension?
• Is the asset being held in the pension primarily for retirement planning or estate planning?
• Would retaining the asset in the pension result in a larger IHT bill than alternative ownership structures?
• Are there liquidity concerns if an IHT charge arises against an illiquid property-holding pension?

Review your position

There are many beneficial planning reasons for holding commercial property and/or land in a pension scheme, and the upcoming Inheritance Tax Changes do not remove them. For many, these arrangements will continue to be effective and commercially sensible.

However, where pension funds contain significant property or land holdings, it may be worth reviewing existing arrangements ahead of April 2027. Understanding how the proposed changes could affect your wider estate planning objectives can help ensure your structure remains aligned with your long-term goals.