RP Case Study: Maximising the funding of property purchase through a pension

    Stephen McPhillips explores how the carry forward rules can be used to maximise the funding of a property purchase through a pension

    Ralph and Jessica are successful lawyers. They practice from a modern office building which is owned by a Limited Liability Partnership (LLP), in which they are partners. Their legal practice (a separate limited company that they run) leases the property from the LLP and it pays a commercial level of rent to the LLP for occupying the building. The property has recently been valued by a registered valuer at £450,000. It is elected for VAT (VAT registered).

    They have been speaking to Charlie, their financial adviser, about the possibility of moving the property into a more tax efficient environment, but with limited existing pension assets between them, Charlie knows that funding the purchase through pensions will be a challenge. Charlie obtains an update on their existing pension fund values and discusses with them the options for their limited company to make contributions into their self-invested personal pensions (SIPPs) for them. Fortunately, the company is cash-rich and, equally fortunately, Charlie knows that Ralph and Jessica have significant carry forward (of unused annual allowance) capability.

    Charlie had considered using a small self administered scheme (SSAS) for them, but in light of HMRC registration timelines (currently taking between three and six months), this was discussed and discounted as an option because Ralph and Jessica wished to move quickly on the purchase. They opted for joint SIPP purchase and it was agreed that the purchase would be split 60/40 in favour of Ralph due to shareholder and other agreements in place between Jessica and Ralph.

    Charlie had established that Jessica’s existing pension was valued at £56,000 and Ralph’s at £51,000. There was a limitation on company contributions due to the annual allowance and carry forward capability. Charlie calculated this limit to be around £250,000 and he assessed that SIPP borrowing would be required to make up the purchase price plus costs. He was mindful of SIPP company to make contributions into SIPPs for them. Fortunately, the company is cash-rich and, equally fortunately, Charlie knows that Ralph and Jessica have significant carry forward (of unused annual allowance) capability.

    Charlie had considered using a small self administered scheme (SSAS) for them, but in light of HMRC registration timelines (currently taking between 3 and 6 months), this was discussed and discounted as an option because Ralph and Jessica wished to move quickly on the purchase. They opted for joint SIPP purchase and it was agreed that the purchase would be split 60/40 in favour of Ralph due to shareholder and other agreements in place between Jessica and Ralph.

    Charlie had established that Jessica’s existing pension was valued at £56,000 and Ralph’s at £51,000. There was a limitation on company contributions due to the annual allowance and carry forward capability. Charlie calculated this limit to be around £250,000 and he assessed that SIPP borrowing would be required to make up the purchase price plus costs. He was mindful of SIPP borrowing being limited to a maximum of 50% of the net asset value of each SIPP and he wanted the SIPP borrowing percentage to be the same across both SIPPs. Jessica and Ralph negotiated SIPP borrowing terms with a commercial lender.

    Finally, Charlie received confirmation from Ralph and Jessica that the purchase should qualify as a transfer of a going concern (TOGC) for VAT purposes, and hence that VAT would not be payable on the purchase price and associated stamp duty land tax (SDLT) liability. Charlie ensured that the SIPPs were registered for VAT and the property opted to tax in order to make use of the TOGC rules.

    The purchase was structured as follows –

    Property purchase price                              £450,000

    Purchase expenses (SDLT, fees, etc.)       £  16,500

    Total cost of acquisition               £466,500

     

    Funded by –

    60/40 ownership split:

    £279,900 Ralph’s SIPP
    £186,600 Jessica’s SIPP

    Total                                                                  £466,500

     

    Represented by –

    Member Pension transfer Company contribution using carry forward SIPP borrowing Total
    Ralph £51,000 £160,000 £68,900 (32.6% of SIPP value) £279,900
    Jessica £56,000 £84,666 £45,934 (32.6% of SIPP value) £186,600
    (£107,000) (£244,666) (£114,834) £466,500

     

    Charlie reminded Jessica and Ralph of some of the benefits of the purchase via the SIPPs –

    • The LLP received £450,000 in cash, which enabled it to repay debt and to fund another capital project
    • The rent of around £35,000 per annum is now received tax free into the SIPP bank accounts and grows tax free within the SIPPs, rather than it being received by the LLP
    • Once the SIPP borrowing is repaid, the full amount of rent can be fully reinvested in line with Charlie’s investment recommendations
    • The property itself grows tax free within the SIPPs and will not be subject to capital gains / corporate taxes upon eventual disposal by the SIPPs
    • The limited company obtained corporation tax relief on company contributions of £244,666, which dramatically reduced its corporation tax liability for the year
    • The property can be held indefinitely within the SIPPs and effectively passed down generations through nominee and successor death benefit payments

    Stephen McPhillips is technical sales director at Dentons Pension Management Limited

    You can hear from Denton’s Stephen McPhillips, as well as other expert speakers at the Retirement Planner Forum in London on 14 June. Find out more or book your place here