Case Study: Buying commercial premises for a partnership with a pension fund

Business owners use Self-Invested Personal Pensions (SIPPs) to buy their business premises

Brian and Sally are partners in a light engineering firm. In 2007 they realised they had outgrown their premises and after some searching found a new unit costing £200,000 plus £35,000 VAT, which was 17½% at the time. Their commercial mortgage broker had obtained a promise of a commercial mortgage at Base Rate +2% over 15 years. It wasn’t a bad deal but only the interest element would have been eligible for tax relief.  They asked to see me because they were worried about taking on so much debt at their time of life – Brian was 50 and Sally 48 – and in their words wanted “To be insured up to the eyeballs.”  They were worried that in the event of ill-health preventing them from working they’d be unable to keep their business going and they’d fall into default on their borrowing.  The bank wanted a charge on their home as well as the business premises, putting them at risk of losing their house.  As their business was a partnership, not a limited company, we couldn’t use a Small Self-Administered Scheme (SSAS).  We could however use a Self-Invested Personal Pension (SIPP).  We asked how much they’d each earned the previous tax year?  Answer: £30,000 each.  Had they any pension funds already?  Answer: Yes, Sally had £40,000 in her funds, Brian £80,000.  And how much equity would they have from the sale of their existing premises? Answer: £50,000.  So, we had a plan.

We funded net pension contributions to a Self-Invested Personal Pension (SIPP) of £24,000 each using the equity released from the sale of their old premises.  Those contributions grossed up to £30,000 each with tax relief.  Then we transferred in their existing pension plans.  That brought Sally’s fund to £70,000, Brian’s to £110,000 making £180,000 in all.  The SIPP borrowing rules would enable them to borrow up to 50% of the fund value, i.e., up to another £90,000, which would be more than enough.  To allow some ‘headroom’ for costs we borrowed £55,000 of which £35,000 was a VAT loan.  By butting the transaction up to the end of the VAT quarter the VAT element was only borrowed for a few days. The end result was that instead of being saddled with borrowings of £200,000 over 15 years we had them debt-free within two years.  Since then, all the rent their business has paid has been paid into their own pension fund.  We also advised them to incorporate their business.  They told us that their accountant has been nagging them to incorporate for several years.  Our advice tipped the balance and they incorporated as we’d advised.  Once they’d incorporated, we were able to transfer their SIPP to a Small Self-Administered Scheme (SSAS) to reduce the running costs.  Under our FairFees Promise we did the SIPP-to-SSAS transfer free of charge.