Case Studies

Kevin is a mechanic and owns a small motor repair business from a garage that he rents; he has a ten year lease with a three year rent review clause. His landlord is moving abroad and has approache

Kevin is a mechanic and owns a small motor repair business from a garage that he rents; he has a ten year lease with a three year rent review clause. His landlord is moving abroad and has approached Kevin to see if he wishes to purchase the garage for £120,000.

Kevin is very interested.

He visits his bank manager but he doesn't know where he could raise the deposit that the bank would require of £30,000 ie 25%. His bank manager has suggested that he remortgages his house to raise the deposit but his wife has 'put her foot down' and said absolutely not.

Kevin is worried about his landlord selling to the local builder who would demolish the garage and build a couple of houses on the site. Later that day he starts chatting to one of his neighbours about his dilemna. She asks Kevin if he has a pension provision. Kevin has as his father insisted that he put 10% of his salary into a pension scheme and he has done since he came out of his apprenticeship at the age of eighteen. His neighbour tells Kevin to contact his financial adviser Richard and discuss the feasibility of buying the property using his pension scheme.

Richard informs Kevin that he has a transfer value of £60,000 in respect of the non protected rights element of his scheme. If he was to transfer this to a SIPP he could borrow a further £30,000 within his SIPP and then a further £30,000 personally. This would result in Kevin owning three quarters of the property in the capacity as a trustee of his SIPP and one quarter personally.

Kevin was delighted with this solution.

John is a haulage contractor based in Yorkshire who has built up a very successful business on the back of contracts with many blue chip companies. The company is called Kings Haulage Contractors L

John is a haulage contractor based in Yorkshire who has built up a very successful business on the back of contracts with many blue chip companies. The company is called Kings Haulage Contractors Ltd. Ten years ago when he first established the business John re-mortgaged his home to raise the deposit to purchase a warehouse and large adjoining yard at the price of £150,000. Ten years down the line the mortgage has been settled.

John is now 55 and would like to consider retirement in the next five years.

John takes a salary of £50,000 per year.

John has his usual year end meeting with his accountant Ben who suggests the following tax planning exercise.

To transfer ownership of the property into the company i.e. debitting the value of the property into the company balance sheet and crediting the directors loan account. At a value of £200,000 this would result in John being able to draw four years salary from his directors loan account with no tax or NI implications. It would give rise to a capital gains liability of £5,000.

This is fantastic tax planning but it doesn't end there.

As the company owns the property, Ben suggested to John that on the completion of the transfer to the company we then transfer the property into a pension scheme known as a SIPP. This would wipe out the corporation tax liability. The property value would need to be supported by an independent valuation and Ben went on to explain that he would need to liase with the local HM Revenue & Customs office as he would with any large company contribution, but it is feasible that tax relief would be acheived on the transfer.

Ben went on to explain that the company would pay a commercial rent to the pension scheme to which the company would receive tax relief and the scheme would acquire a cash pot in addition to the property asset to which John could invest in any way he wished. As with all pension schemes, John could take a tax free cash amount of 25% of the fund value from age 55 and take the remainder of the fund as a pension immediately or delay it up to the age of 75.

John was thrilled as his retirement provision was playing on his mind. John was also made aware that the property was protected from his company creditors and no further capital gains would accrue within the SIPP. The rental received in the SIPP would be free from income tax.

Anna has a hairdressing salon of which she has been proprietor for twenty years. She has just made the last payment on the mortgage of the building that her salon occupies. The building has been in

Anna has a hairdressing salon of which she has been proprietor for twenty years. She has just made the last payment on the mortgage of the building that her salon occupies. The building has been independently valued at £100,000.

Anna has been reading about SIPPs and commercial property in the Sunday Times and calls her accountant, Jane to ask her if a SIPP is viable in her circumstances. She works out a scenario for Anna that will effectively wipe out her tax bill. Based on profits of £40,000 to £45,000 for the next three years, we can transfer the property as an in-specie contribution into a SIPP scheme over this three year period. This would mean the following ownership of the property over the next three years:

Year One 1/3rd SIPP and 2/3rds Anna

Year Two 2/3rds SIPP and 1/3rd Anna

Year Three 100% SIPP

This would effectively achieve the situation of Anna having nil tax for three years except some capital gains due on the sale of the property which Jane has yet to calculate.

The proportion of the property is transferred into the SIPP net of basic rate tax. The SIPP administrator reclaims the tax back from HM Revenue & Customs which is received as cash and deposited in the SIPP bank account and invested in whatever way the client wishes within the realms of the HMRC regulation. The figures may change from year to year as the property may increase in value. As Anna is a 40% tax payer a further 20% tax is reclaimed via her tax return.

A commercial rent is received into the SIPP paid by the salon to which Anna can offset against her profits and the property is protected from company creditors. No further capital gains accrue in the scheme and the rent received in the scheme is free from income tax.

Alison and Julian are partners in a solicitors practice on the outskirts of Manchester. They currently rent the premises which the practice occupies but are most keen to invest in a property which

Alison and Julian are partners in a solicitors practice on the outskirts of Manchester. They currently rent the premises which the practice occupies but are most keen to invest in a property which to trade from.

They have no existing pension provision and are most conscious of this as Alison wants to retire from work in fifteen years and Julian in twenty years.

Their current earnings are £120,000 each.

They organise the annual meeting with their financial adviser, Tim and discuss their aspirations with him.

Fortunately Tim worked closely with a SIPP company and has a fantastic knowledge on the tax advantages of commercial property in a pension scheme. Tim goes on to explain that a SIPP is a pension scheme that has increased investment flexibility and the rules permit the purchase of commercial property. A SIPP enjoys all the tax advantages of any other pension scheme purchased through an insurance company. He went into detail:

Let's say a property to the value of £250,000 is proposed (including costs).

The practice proposes a contribution of £60,000 into the SIPPs ie. £30,000 per SIPP. The £60,000 is a net contribution and as Alison and Julian are 40% tax payers, the pension scheme can reclaim the basic rate tax at 20% so the £60,000 is increased to almost £75,000. The partners can go on to reclaim a further 20% via their tax return which amounts to almost £15,000.

The SIPPs have the power to borrow 50% of the scheme value ie. £75,000 x 50% which equates to £37,500. We have now funded £112,500 of the property purchase. The difference of £137,500 could be loaned to Alison and Julian personally so that a proportion of the property would sit outside the scheme.

A commercial value would need to be placed on the annual rent and the proportion of the property owned in the SIPP, would need to receive the same proportion of the annual rent which would service the borrowings taken by the SIPPs.

Alison and Julian are most pleased that Tim has satisfied both their aspirations in a most tax advantaged way!