Hannah and Tom run a busy recruitment consultancy partnership. Continued success and growth of the business has resulted in the need for more desk space for their team of recruitment consultants.
Having planned for such growth in their business, they have been searching the local property market for a suitably sized office building and found one which fits the bill for them.
It’s a modern two storey office building on a popular business park on the outskirts of town, which also means that it comes with ample car parking for their employees.
It’s larger than they actually need for their business, but they see that as a positive because of the scope to sub-divide the property internally and to lease the other space to another tenant. Given the popularity of that business park, they believe they will find a tenant very quickly.
Overall transaction costs
The purchase price of the property has been negotiated with the unconnected vendor at £800,000.
Hannah and Tom take care to establish early-on in the process that the property is “opted to tax” and hence VAT will be payable on the purchase price. They have also checked with their accountant and solicitor that the transaction will not qualify as a “transfer of a going concern” (TOGC). Had it done so, VAT would not have had to be paid on the purchase price.
Therefore, Hannah and Tom need to ensure that they can fund the VAT element of £160,000 and their solicitor informs them that the Stamp Duty Land Tax (SDLT) liability will be based on the purchase price plus VAT. In round terms, Hannah and Tom calculate that they need just over £1m to fund the purchase plus all associated costs.
Source of funding
Both Hannah and Tom have been fortunate enough to be able to fund their existing self-invested personal pensions (SIPPs) quite well over the years and their accumulated pension savings currently sit with investment platforms in a range of different funds. They also have sufficient pensionable earnings and liquid cash to make personal contributions up to the £40,000 annual allowance in the current year. In total, they will have £700,000 in their platform SIPPs and they know that, if they transfer to another SIPP that offers property purchase as an investment option, SIPP borrowing of £350,000 could be arranged, making a maximum possible fund for the purchase of £1.05m.
The stumbling block
Unfortunately for Tom, part of his current fund holdings includes £40,000 in an investment fund that has been suspended and cannot currently be sold-down to cash.
Tom has realised that this £40,000 figure is crucial to the overall proposal and, without it, the intended property purchase cannot be funded in its entirety by the SIPPs.
Funding excluding the suspended fund
A fund of £660,000 (£700,000 minus the £40,000 suspended fund) would enable SIPP borrowing of £330,000, making a maximum possible purchase price of £990,000. Hannah and Tom know that this will not be sufficient to meet the purchase price plus all associated costs.
Hannah and Tom speak to a bespoke SIPP provider in order to check and confirm their calculations and also to check that the proposed property will be acceptable to that provider.
The provider checks that an RICS Registered Valuer will be consulted about the open market level of rent to be paid by the recruitment consultancy for occupying its portion of the property and this is confirmed.
The provider accepts the property in-principle and points out that, should it be possible for the suspended fund to be transferred into Tom’s bespoke SIPP “in-specie” (without being sold), then its value could be included in the maximum borrowing calculations, even though the liquid cash would not be available to use in the purchase.
Tom checks with his platform SIPP provider that this will be possible and, fortunately, this is confirmed. Hannah and Tom inform the vendor that there might be a short delay in completing on the purchase to allow for the in-specie transfer of the suspended fund to take place and the vendor agrees to a revised target date. Hannah and Tom establish new bespoke SIPPs and transfer-in £660,000 in cash form and £40,000 in-specie (the suspended fund).
Funding including the suspended fund
A fund of £700,000 enables maximum SIPP borrowing of £350,000, thereby giving an overall fund of £1,050,000. However, of this, £40,000 is held in the suspended fund. This means that Tom and Hannah’s SIPPs have available cash of £1,010,000 to cover the purchase price and all associated costs.
Luckily, that’s just enough to cover all of the costs and the SIPPs complete on the purchase in good time.
Stephen McPhillips is technical sales director at Dentons Pension Management