Property purchase with no existing pension provisions
Ali and Larry are partners in a dentists practice on the outskirts of Manchester called McBeals. 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 Ali 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 Tom and discuss their aspirations with him.
Fortunately Tom worked closely with a SIPP company and has a fantastic knowledge on the tax advantages of commercial property in a pension scheme. Tom 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 Ali and Larry are 40% tax payers, the pension scheme can reclaim basic rate tax at 20%, so the £60,000 is increased to £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 Ali and Larry personally so that a proportion of the property would sit outside the scheme,(they will have to put some deposit down for the personal element of the ourchase, as the SIPP cannot increase the borrowings they could obtain or act as a deposit for the personal lending).
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.
Ali and Larry are most pleased that Tom has satisfied both their aspirations in a most tax advantaged way!
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