Example case study: Joint property purchase

Please note this case study is not based on real life events and is intended to demonstrate how a SIPP can be used in a specific scenario.

Before such a transaction is entered into we would recommend that advice is taken from a suitably qualified Independent Financial Adviser.

Problem

Charlie Dickens has his own Accountancy practice which he runs as an LLP from rented offices. The landlord has told Charlie that he wants to sell the building and asks whether he would be interested in buying it.

The offices are on the high street and as Charlie has been there for some years he is well known in the area and wouldn’t like to move. He also likes the idea of owning a property which he has some control over.

Charlie speaks to his Financial Planner about how best to fund the purchase. The key facts are:

• The asking price for the offices were £300,000 but Charlie has negotiated a discount to £295,000
• Charlie has £100,000 in various pensions, he also has £40,000 in spare savings which he could use to help purchase the property
• The Accountancy practice is very successful and Charlie enjoys a salary is £100,000 a year
• The Accountancy practice has £25,000 spare capital available which could be used to help purchase the property

Possible solution

It is clear to Charlie’s adviser that the most appropriate way forward is for the property to be bought jointly by a SIPP and the business.

Charlie’s adviser explains to him that the property cannot be bought in a Personal Pension and that a SIPP would need to be used, with a market rent being paid to the SIPP each month. Charlie is happy to do this, he would prefer to pay rent into his own pension rather than the existing landlord.

Charlie’s adviser also explains the main advantages and disadvantages of using a SIPP to buy a property. Charlie listens and decides at the end of the conversation he still wishes to proceed.

His adviser then conducts research into Charlie’s existing pensions to confirm that if they are transferred to a SIPP no important guarantees would be lost and that no penalties would be charged, this is not the case and once a suitable SIPP is identified the transfers takes place, but not before his adviser explains the charges associated with a SIPP property purchase and compares these to the existing pensions.

Once the £100,000 transfer proceeds have been received they are held in the SIPP bank account awaiting the completion of the purchase.

The adviser also recommends the following:

• Charlie makes a personal contribution of £40,000 and HMRC pay £10,000 basic rate relief to the SIPP. Charlie will also qualify for additional tax relief which he will claim through his tax return
• The SIPP borrows £75,000 from Charlie’s existing bank, who know him well and are supportive of his business. This means £225,000 is available
• The partnership borrows £50,000 which means a total of £75,000 is available
• The SIPP purchases 75% of the property, with the partnership purchasing 25 on a tenants in common basis
• The £5,000 balance is used to meet legal costs, SIPP set up fees and pay for the advice given by Charlie’s Financial Planner

Summary

By utilising his SIPP along with money in the business Charlie has been able to buy premises for his business.

The purchase would not have been possible without the use of a SIPP as the capital available outside of the SIPP would have not provided a sufficiently large deposit to secure bank financing.

Furthermore Charlie likes the tax efficiency of owning a proportion of the property in his SIPP, he believes that he is buying when property prices are low and anticipates capital growth over years to come. Although he is smart enough to realise that this is far from guaranteed.

Finally he likes paying rent to his own pension rather than a landlord, whilst a proportion of the rent will be used to repay the bank loan; once this has ended it will start to build his pension fund to help finance his retirement.

Next steps

If you would like to learn more about buying your business premises in a SIPP then speak to our team of highly qualified and experienced Independent Financial Advisers on 0115 933 8433 or email info@investmentsense.co.uk