We want to expand our business interests and are looking to purchase another set of offices. Can we use the pension scheme in the same way as we have previously?
We previously used your small self-administered pension scheme to purchase an office which has been leased back to one of your companies. As you are aware, this is a very tax-efficient arrangement and technically there is no reason why more than one property cannot be held within the pension scheme.
As these types of arrangement are written under the occupational pension scheme rules, the standard Inland Revenue rules apply to them and there is a maximum amount of pension that can be paid based on your salary and service. As we have discussed previously, because the company was not formed until after 1989, the Inland Revenue applies a maximum salary cap, which is £95,400 for the current tax year. If this figure is projected into the future with prospective increases in line with inflation, the amount of pension benefits you can draw is restricted to two-thirds of this projected capped salary.
Our concern would be that, if a further property of the size you are talking about were to be purchased by the scheme, it could potentially become overfunded at some time in the future. If the scheme becomes overfunded, then, apart from possibly transferring the monies to other members, the usual way of clearing the overfunding is to refund monies to the sponsoring employer and, unfortunately, the Inland Revenue takes a standing 40 per cent tax charge on this refund.
In your circumstances, as you are likely to sell the company before or at retirement, there is the danger that you may not benefit fully from the net refund and that this could go into the hands of the new purchasers.
There is another type of pension arrangement that can be used for property purchase and this is the self-invested personal pension, which is set up under personal rather than occupational pension rules. As controlling directors, you are not allowed to contribute to a personal pension at the same time as being in the occupational SSAS but there is no reason why you could not transfer your previous pension benefits into a Sipp and use these for a further property purchase.
Both yourself and your co-director have pension benefits which we have left with a previous scheme. These could be transferred and form the deposit for a property purchase through your new Sipp.
As you may remember from buying a property through the SSAS, there is a ruling that the pension scheme's borrowings cannot exceed three times the ordinary annual contributions plus 45 per cent of the scheme assets. This rule would require you to increase the annual contributions to the SSAS to borrow sufficient monies to fund the property purchase.
With a Sipp, there is no limit on borrowing in relation to contributions although, typically, lenders will only wish to advance up to 70 per cent of the property value. Therefore, the transfer values need to provide a sum of around £30,000 plus any attendant costs for legal fees.
Looking at the transfer values from our file, there should be sufficient funds to pay the deposit and cover the plan fees. We would therefore suggest that you take the transfer values and jointly purchase the property through a Sipp. A lease agreement between the company and the Sipp would then be set up and regular payments would be made to cover the mortgage and also provide some additional funds that would go into the pension. This rental income is not treated as a pension contribution but as investment growth. Therefore, there is no reason why this arrangement could not be left running while you continue to run the SSAS. The plan will need to be counted in your overall funding check as a retained benefit.
We will obviously need to satisfy ourselves that taking the transfers from the previous arrangements will not be disadvantageous. The property itself will need to be surveyed to ensure there is nothing structurally wrong with it and that the rental income will be sufficient to cover the mortgage repayments. Normally, an additional return of 15 per cent is required. I look forward to discussing this option with you further in due course.