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Financial planning case study: Sipp solution to property fix

The problem – the client is a self-employed businessman renting his unit on a flexible lease.

He has pensionable income of £100,000 in the tax year. The landlord is now looking to sell the building and has given the client first refusal to buy it at a value of £300,000 plus VAT. He has around £80,000 in his business that could be put towards such a purchase but due to a recent divorce he has been left with an impaired credit history.

He does, however have a personal pension worth £200,000 but, after funding this heavily in the past few years, he has no carry-forward allowance.

Issues to take account of:

  • The client has built up a good customer base and does not want to disrupt this by placing his unit at risk from new owners with different agendas. He also feels that it will be a good investment due to regeneration in the area.
  • His borrowing capacity is impaired and even if was granted it would be at a largely inflated rate.
  • He has a personal pension plan worth £200,000 with £80,000 in his business but has no carry-forward allowance, meaning he is restricted by the £50,000 annual allowance.

As the client will find borrowing difficult in this economic climate, even without the complication of an impaired credit history, we must look at alternatives.

The client could use his personal pension to help him with this purchase but would first have to transfer it to a fully self-invested pension plan that allows commercial property purchase. The Sipp has the facility to borrow up to 50 per cent of the net assets of the plan to help him make the proposed purchase and as it is the actual Sipp that is borrowing the money from the commercial lender, the client’s credit history will not be an issue.

However, even with this borrowing of £100,000, the plan is still short of funds to help meet the VAT and associated buying costs, such as stamp duty, adviser and conveyancing fees.

The client has funds available of around £80,000 but as he has no carry-forward remaining, he can only contribute £50,000 gross.

A solution to this is to contribute £40,000 net to the Sipp before the end of the tax year and then end his pension input period. He can then contribute a further £40,000 net the day after, meaning this contribution will be valued against the following tax year’s annual allowance limit.

The client now has an additional £100,000 in his Sipp as it will collect £20,000 in tax relief, which is enough to effect the purchase. He will also be able to reclaim a further 20 per cent tax relief on his contribution via his self-assessment form.

The property can now be purchased with a lease arranged with the Sipp as landlord and the client as tenant, with an independent valuation obtained to ensure that a full market rent is paid by the client to the Sipp. As the Sipp is VAT-registered, the £60,000 VAT will eventually be claimed back to the Sipp. This can then reduce the borrowing, meaning that rental payments will clear the remaining debt quicker. All rental payments will be an allowable business expense to the client.

The Sipp has purchased the property using gross funds. If the client had used the £80,000 as a conventional deposit towards a commercial loan these would have been paid after tax, at net.

The premises will now grow in a tax-efficient environment and will be exempt from capital gains tax if sold while in the Sipp.The unit is also protected from any deterioration of the company’s finances, should that occur in the future.

It must be noted that the commercial property now takes up the majority of the client’s plan but, as a large bulk of the borrowing has been cleared via the reclaimed VAT, this will expedite repayment of the remaining loan, with future rental payments being paid into the Sipp and available for a more diversified portfolio. The same can be said of the client’s future contributions to the plan.

Gareth Reynolds is the owner of MGS Financial



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