Mike (aged 52) and Jenny (aged 50) are married and each holds 50% of the shares in their own limited company, M&J Ltd. After tightening their belts and being very careful after the 2008 crisis they have done well and now hold £500,000 on deposit. They have been reluctant to draw it due to higher rate tax and have been minded to buy their own commercial property rather than keep paying rent.
The bank was charging £800 per annum to hold the deposit (negative interest rate), prompting the couple to ask three questions:
1. ‘Can we achieve an improved return?’
2. ‘Can we withdraw the money tax efficiently?
3. ‘Can we use the money to buy property?’
As the company has grown, Mike and Jenny have taken on more space in their trading premises. The rent is around £3,000 a month and they may be able to buy the property as the landlord has expressed an interest in selling. We calculated they could both fund their pensions to the maximum of £360,000 in total as they have made no pension provision in this and the last three years (assuming the business had profit in excess of this for the current trading year). They do have some old pensions from previous employment that had a transfer value of £210,000.
Pulling all this together into a Self Invested Personal Pension (SIPP) or a Small Self Administered Scheme (SSAS) would mean that could accrue £570,000 into a pension over the next twelve months. As well as moving all this money into their own account without any corporation or personal tax, they now have the opportunity to purchase the commercial property. It is likely to be up for sale at £600,000, so their pension scheme can, if needed, take a mortgage to help buy the property. M&J Ltd would secure a commercial lease with their own pension scheme as their ‘landlord’ and the £3000 pm rent would then be paid directly into their pension, in addition to any other future pension contributions. The rent would carry on being treated as a trading expense and accrue full corporation tax relief, and there is no income tax to be paid on the rent as it is treated as an investment return for the pension.
The scheme can borrow up to 50% of it’s net assets, so in this example a lender was more than happy to lend the difference needed to fund the purchase, and the mortgage in this case was repaid over ten years from the incoming rents to the scheme.
As well as moving a substantial amount out of the company without creating a tax liability, they have increased the amount being paid into their own ‘accounts’ for their own long-term security and no longer have the insecurity and potential hassle of a remote landlord. The future investment returns from the rents and capital growth are all sheltered from tax in a vehicle that is also exempt from Inheritance Tax.
There are of course some costs in the advice and implementation of the schemes, and costs incurred in the purchase of the property.
Mike and Jenny can’t access any of the pension until they are 55, tax may be due on withdrawals from the pension in the future, but the first 25% of value of the scheme can be paid tax free, and with the new flexibilities this can now be drawn down in tranches as ‘income’. Anything drawn over the 25% is taxable as income, but if they have retired and no longer trading, they will probably be basic rate tax payers so could only be paying tax at basic rate on 75% of their income potentially.
It would be wise in this example for the rents to accumulate as cash or as liquid investments inside the pension (after the mortgage costs) to give some liquidity to the scheme. At the point they want bene ts they can sell the property and draw the sale proceeds out as income if needed, or draw the rental income of the property as income, via the scheme.
This information does not constitute an offer or advice and the service described may not be suitable for everyone. Alternative services may be offered if more suitable.