Gerard and Katie own a large city-centre hairdressing business including the business premises which they bought as a personal asset some 20 years ago. The building has a penthouse apartment with its own separate entrance, rented out as residential accommodation. The basement, ground and first-floors are exclusively business premises. Gerard and Katie also own a large and prestigious property in a North Yorkshire market town. Whilst they and their business were doing well when they first consulted us, we saw a way to leave them significantly better off. They had a large mortgage on their home and were paying Income Tax on the rent which their company was paying them for their business premises, and more tax still on the rent being paid by the tenant of the penthouse flat. Ideally, they wanted to pay off their mortgage and be debt free. They also wanted to pay less tax. (Who doesn’t?!)
So, we came up with a plan. This involved separating the commercial element of the building from the residential element, creating a 250-year leasehold on the commercial part of the property capable of being sold separately while Gerard and Katie continued to own the freehold of the building. This was necessary because residential property, e.g., houses and flats, cannot be held as assets by a pension fund. Having mapped out the outline plan we then asked Gerard and Katie to take advice from their accountant as to their Capital Gains Tax position if they followed the plan we’d formulated. In due course their accountant worked out their liability and they decided they were happy with it. Having resolved the tax position to their satisfaction, next came the legals. Their solicitors created a leasehold on the commercial part of the building. That leasehold was then independently valued by an RICS qualified surveyor. The valuation was somewhat in excess of the value needed to pay off their own mortgage. Perfect!
Next, we transferred their pension funds into a Small Self-Administered Scheme (SSAS) and generated enough cash to enable their joint pension fund to buy the leasehold from them. That legitimately released more than sufficient cash from their pension fund for them to pay off their mortgage. Gerard and Katie are now debt free and their business pays rent to their pension fund. The rent paid qualifies as a legitimate business expense and so reduces their annual Corporation Tax bill. The tenant of the penthouse flat meanwhile still pays his rent direct to Gerard and Katie providing some useful additional income. When they retire their pension fund will still own the building and can either sell it for a lump sum or rent it out so that their SSAS fund earns an income which can be paid out to them as their pensions along with the income they earn from their flat and from the other investments in the pension fund we manage for them. In the very long-term, ultimately, they can pass the freehold of the property via their Wills to their children who in their turn can continue benefiting from the flat’s rental income.
