As a trusted independent firm of financial advisors, operating across the North East, Cumbria, Yorkshire and the Borders, we have handled a wide range of Self Invested Personal Pension (SIPP) cases for clients – and now we’re sharing some of the most interesting scenarios to highlight the difference tailored, professional advice can make.
Please note - This content is an illustrative example only and is not under any circumstances to be considered as the provision of financial advice.
Client A runs a successful engineering business and operates this from rented premises on a popular industrial estate.
The option has arisen for Client A to buy the freehold interest in the industrial unit. The landlord is selling the property for £200,000 and it is not opted to tax for the purposes of VAT.
The client has existing pensions, with a collective value of around £150,000. These are subsequently transferred into a SIPP, allowing them to facilitate a commercial property purchase.
Allowing for Stamp Duty Land Tax, and the various fees associated with the purchase, the client estimates requiring £220,000 overall as, once the property is purchased, he proposes undertaking some minor alterations to the property to increase the office space within the unit.
With all of this accounted for, the client remains £70,000 short of the required investment and does not currently have the capital to make any kind of pension contribution.
Client A has a good relationship with his business bank and they agree to lend his SIPP the required £70,000 over 10 years, making up the shortfall and taking the property as security. However, this is on the basis that the client’s business establishes a lease on an ‘open market rental value’ as provided by an Independent Chartered Surveyor.
The client now has the purchasing power to move forward with the purchase and the solicitor completes the transaction.
A lease, which has been drawn up by the solicitor, overseeing the property purchase on behalf of the SIPP pension trustees, is established upon completion. This lasts for a 10-year term which mirrors the loan from the bank, and the client is paying £18,000 per annum.
The rental income more than adequately meets the ongoing loan repayments from the SIPP to the bank and there is a monthly surplus which can be used for additional investment.
Purchasing their own business premises through a SIPP provides Client A with a tax efficient arrangement with a range of benefits including:
- Payment of rent by the company is an allowable business deduction and is now being paid for their own benefit, rather than to a third-party landlord
- Their SIPP receives the rent and pays no income tax on it
- Any future growth in the capital value of the freehold interest in the industrial unit will be exempt from capital gains tax, further adding to the client’s retirement fund
The property and other assets are in the SIPP’s discretionary trust, and therefore outside of client A’s estate. This means they will not usually be subject to inheritance tax if they were to pass away and, if their business were to fail, the trust protects the property from the company’s creditors.
If this scenario sounds familiar, or you’re looking to get advice on your own unique SIPP scenario, contact our expert team today and continue to follow our blog, sign-up for our newsletter and follow us on LinkedIn for expert advice on a range of financial services.