Mike and Peter run a small, but very successful, limited company that supplies parts to the motor trade. Their business has outgrown the property it currently trades from and, coincidentally, the lease between their company and its landlord is coming to an end soon.
As part of their ongoing financial planning reviews with their financial adviser, Cathy, they mention that they are on the hunt for new premises and they ask Cathy for advice on the possibility of using their accumulated pension funds in some way to help with the acquisition of new premises.
They tell Cathy that they’re likely to have to spend around £600,000 to buy premises that will be large enough to meet their current and projected needs. They also explain that the property market for small to medium-sized industrial units is very competitive because of a lack of supply at the current time.
Cathy explains that their current platform pensions do not permit direct investment into commercial property, but there are pension vehicles which can, and do, permit this type of investment. Cathy further explains that, until now, their investment needs have been met by the platform pensions and, consequently, they have not had to pay additional fees for investment flexibility afforded by a self-invested pension such as self-invested personal pensions (SIPP) and small self-administered schemes (SSAS). Cathy confirms that the current value of their existing pensions is £350,000 in total for both.
The funding problem
Mike and Peter realise that their accumulated pension funds are insufficient to enable the purchase of premises costing around £600,000. They ask Cathy if it is possible for SIPP/SSAS to borrow funds to assist with property acquisition and Cathy confirms that the rules for borrowing are identical across both SIPP and SSAS – 50% of net asset value in the SIPP/SSAS, minus any outstanding pre-existing borrowing.
Cathy confirms that should Mike and Peter switch to bespoke SIPP/SSAS, maximum borrowing would be £175,000 (50% of the accumulated funds of £350,000 ), giving the pension arrangement(s) a purchasing power of £525,000 (£350,000 plus £175,000) – still some way short of the £600,000 anticipated purchase price.
She also explains that should VAT be payable on the purchase price, that will add 20% to the purchase price initially, and it also means that the Stamp Duty Land Tax (SDLT) or Land and Buildings Transaction Tax (LBTT) will be higher because these are based on the purchase price plus VAT.
Cathy reassures Mike and Peter that the pension arrangement(s) can be registered for VAT (and opt to tax the property) in order to reclaim the VAT on the purchase price, but that the reclaim can take around 18 weeks to be received from HMRC. She stresses that specialist VAT advice should be taken and Mike and Peter note that the VAT needs to be paid up-front, in order to be reclaimed.
Cathy outlines the scope for employer contributions to be paid into SIPPs / SSAS and she explains that neither of them have available annual allowance in the current tax year because they have used up this year’s and all available annual allowance from the three previous tax years, through a recent carry forward exercise.
Mike and Peter are disappointed to conclude that it might not be possible to acquire the property they need through their pensions.
The potential solutions
Cathy points out that there are ways in which to address the funding problem. Firstly, rather than involve a commercial lender in the purchase, it is possible for the limited company to lend funds to the SIPP/SSAS, provided that this is done on demonstrably commercial terms. Cathy explains that this could provide flexibility for the structure of the acquisition.
Secondly, and in conjunction with SIPP/SSAS borrowing if required, it is possible for the limited company to jointly buy the property with the SIPP/SASS.
Mike and Peter note that this flexibility around funding means that they can search the market for a property that suits their business needs and that they are not constrained by how much the pension arrangement(s) can afford in isolation.
Cathy concludes the meeting with an explanation of the similarities and differences between SIPP and SSAS so that a decision can be made on the most suitable vehicle to be used.
Stephen McPhillips is technical sales director at Dentons Pension Management