Anne is a very successful orthodontist and runs several busy dental practices through her limited company. An opportunity has arisen that would enable her to expand the business. It involves buying the practice of a local dental surgeon who is retiring after 30 years in the profession. The practice has been valued at £750,000 by a valuer who specialises in the dental sector and this £750,000 figure includes both the dental surgery premises and the fittings and goodwill of the practice. The dental surgery premises also incorporate a substantial 3 bedroomed residential element, which will be vacated upon sale by the retiring dentist.
Although successful and cash-rich, Anne’s limited company does not have the finances to enable it to purchase the practice and property outright and so she turns to her financial adviser, Helen, to seek assistance on possible routes to finance the purchase overall. Helen has strong links with Anne’s accountants and, together, they work to find a solution to meet her needs.
Helen has significant experience of commercial property purchase via self-invested pensions and her first thought is how to involve Anne’s existing pension scheme in the purchase. Helen has been managing this pension scheme for Anne for a number of years and obtains an up to date valuation from the platform it currently sits on. It is worth £210,000, having rallied somewhat compared to its value at points during the previous 12 months. Helen knows that Anne is very happy to switch from a portfolio of collectives in her pension to direct commercial property investment.
Helen explains to Anne that there are some hurdles to overcome in progressing matters. Firstly, the value of the property needs to be isolated from the overall value of the business. This is because the self-invested pension would be acquiring only bricks and mortar rather than any other assets of the practice being sold. Some of these other assets could become “taxable property” if acquired by the pension scheme. Secondly, the value of the commercial element of the property needs to be isolated from the value of the three bedroomed residential element. The residential element, if owned by the self-invested pension, would become taxable property at the point of purchase because it will not comply with HMRC’s narrow rules around mixed use commercial/residential property. Had an unconnected employee of Anne’s business been going to live in the residential element as a condition of employment, then the self-invested pension could have acquired that element of the property without it being treated as taxable property.
Helen had been told by Anne that she wanted the flexibility to be able to lease the three bedroomed flat to a range of possible tenants. Luckily, the flat has its own separate access and services and is self-contained in relation to the dental surgery.
Anne instructs a Royal Institution of Chartered Surveyors (RICS) registered valuer to value the freehold of the whole property. This is confirmed as £340,000. In addition, at Helen’s suggestion, Anne asks for a split of the valuation between the residential and commercial elements. The Valuer indicates that the value of a 999 year long leasehold interest in the dental surgery is £180,000.
Helen had suggested that the value of the long leasehold interest in the surgery should be obtained because, typically in her experience, the self-invested pension would only acquire this in mixed use circumstances so that it has no interest whatsoever in the residential element, including no entitlement to any ground rents from it.
Helen recommends a trusted self-invested personal pension (SIPP) provider that she knows can accommodate a wide range of property scenarios and Anne transfers her £210,000 in cash form into it.
Anne’s business acquires the freehold of the whole property, at the same time as it acquires the fittings and goodwill of the practice. Simultaneously, Anne’s SIPP acquires the long leasehold interest in the surgery for £180,000.
Anne’s SIPP leases the property to her dental business at a rent of £15,000 per annum, an 8.3% yield, the open market rent as confirmed by the registered valuer.
The net effect of Helen’s planning is that £180,000 of the overall practice purchase price has been funded by Anne’s SIPP. This has been crucial to the overall funding of the project and Anne is delighted with the outcome.
Stephen McPhillips is technical sales director at Dentons Pension Management