Office purchase - SIPP or personal purchase?
Discussion
Hi all,
I'm in the process of buying an office to run my business from. At the moment the idea is to use a SIPP. Purchase price is about £500k and I would have to pay most of that into the SIPP myself to fund the purchase as the SIPP currently has limited funds. I would then rent the office from the SIPP for about £35k pa. and these funds would go into the SIPP.
Recently I have been wondering whether I am better to buy the office myself (possibly via an LLP or limited company) and let the business use it rent free. I would then pay into the SIPP (or regular pension) the same £35k pa as an employers pension contribution rather than as rent. So, the same amount makes it into the pension.
I think both the SIPP rent option and the employers pension contribution can be offset against corporation tax so that would be the same if so. Buying the property myself would be simpler, save on SIPP fees and would mean I could free up the capital if needed which I could not if it was in a SIPP.
In case it makes a difference for pension purposes, my salary would be about £80k pa.
What am I missing here? Most people seem to make these purchases via a SIPP but that may be where the SIPP is already in funds.
My IFA is away until next week so I thought I'd open up to the wisdom of PH.
All thoughts welcome.
Thanks in advance.
I'm in the process of buying an office to run my business from. At the moment the idea is to use a SIPP. Purchase price is about £500k and I would have to pay most of that into the SIPP myself to fund the purchase as the SIPP currently has limited funds. I would then rent the office from the SIPP for about £35k pa. and these funds would go into the SIPP.
Recently I have been wondering whether I am better to buy the office myself (possibly via an LLP or limited company) and let the business use it rent free. I would then pay into the SIPP (or regular pension) the same £35k pa as an employers pension contribution rather than as rent. So, the same amount makes it into the pension.
I think both the SIPP rent option and the employers pension contribution can be offset against corporation tax so that would be the same if so. Buying the property myself would be simpler, save on SIPP fees and would mean I could free up the capital if needed which I could not if it was in a SIPP.
In case it makes a difference for pension purposes, my salary would be about £80k pa.
What am I missing here? Most people seem to make these purchases via a SIPP but that may be where the SIPP is already in funds.
My IFA is away until next week so I thought I'd open up to the wisdom of PH.
All thoughts welcome.
Thanks in advance.
There are lots of issues and pros and cons, as you must know by now. For just one thing, have a think about your inheritance tax position and your estate planning because now (as I'm sure you're aware) your fund can be passed to a beneficiary that you have nominated via your pension provider.
This could mean your spouse, your children or grand-children, these days, even the milkman. Ask your IFA about how some of these may apply, especially as the Budget which introduced some changes that got overlooked last year and in 2014.
Bear in mind too, the factors afforded to you (now) with ill health and death provision. If you're young and are going to drop £500,000 into a pension, what's your position in respect of benefit crystallisation events, and your annual and lifetime allowance (will your contribution be made by your company, or by you?)? There are so many other, unique to you, things to consider - no right/wrong answer. I wouldn't focus (overly) on just the here and now.
This could mean your spouse, your children or grand-children, these days, even the milkman. Ask your IFA about how some of these may apply, especially as the Budget which introduced some changes that got overlooked last year and in 2014.
Bear in mind too, the factors afforded to you (now) with ill health and death provision. If you're young and are going to drop £500,000 into a pension, what's your position in respect of benefit crystallisation events, and your annual and lifetime allowance (will your contribution be made by your company, or by you?)? There are so many other, unique to you, things to consider - no right/wrong answer. I wouldn't focus (overly) on just the here and now.
I'm no expert so take this all as a bit of a guess and get some proper advice.
You can only pay in the allowable amount into a SIPP or transfer in existing DC funds. However, you can carry back to prior years (but only a limited number of years - about 4 I think)...so this can help you maximise historical contributions. Definitely not a good idea to put in DB funds into a SIPP generally, at least I can't think of a good enough reason. You probably won't have enough to meet the purchase price by the sounds of it. Advantage of SIPP is pretty much the pension tax wrapper. You can borrow up to 50% of a SIPP or possibly a SSAS if that helps. Banks are more than willing to do this. If you have a spouse/partner you can also double up on funds and use of carry back.
I think the advantage is the rent is effectively taking money out of your business, tax free and keeping it tax free in the pension wrapper. If you charge the business rent you have to pay tax on that rent personally and there is no escape unless you use a pension. Also, you have huge advantages from an inheritence tax point of view as you can pass the property on to your children if applicable, if held in a SIPP.
As I say, please take all this with a pinch of salt... I think it is about right though..
You can only pay in the allowable amount into a SIPP or transfer in existing DC funds. However, you can carry back to prior years (but only a limited number of years - about 4 I think)...so this can help you maximise historical contributions. Definitely not a good idea to put in DB funds into a SIPP generally, at least I can't think of a good enough reason. You probably won't have enough to meet the purchase price by the sounds of it. Advantage of SIPP is pretty much the pension tax wrapper. You can borrow up to 50% of a SIPP or possibly a SSAS if that helps. Banks are more than willing to do this. If you have a spouse/partner you can also double up on funds and use of carry back.
I think the advantage is the rent is effectively taking money out of your business, tax free and keeping it tax free in the pension wrapper. If you charge the business rent you have to pay tax on that rent personally and there is no escape unless you use a pension. Also, you have huge advantages from an inheritence tax point of view as you can pass the property on to your children if applicable, if held in a SIPP.
As I say, please take all this with a pinch of salt... I think it is about right though..
Ginge R said:
There are lots of issues and pros and cons, as you must know by now. For just one thing, have a think about your inheritance tax position and your estate planning because now (as I'm sure you're aware) your fund can be passed to a beneficiary that you have nominated via your pension provider.
This could mean your spouse, your children or grand-children, these days, even the milkman. Ask your IFA about how some of these may apply, especially as the Budget which introduced some changes that got overlooked last year and in 2014.
Bear in mind too, the factors afforded to you (now) with ill health and death provision. If you're young and are going to drop £500,000 into a pension, what's your position in respect of benefit crystallisation events, and your annual and lifetime allowance (will your contribution be made by your company, or by you?)? There are so many other, unique to you, things to consider - no right/wrong answer. I wouldn't focus (overly) on just the here and now.
Thanks both for comments, food for thought. Ginge what do you mean about benefits crystallisation events and allowances?This could mean your spouse, your children or grand-children, these days, even the milkman. Ask your IFA about how some of these may apply, especially as the Budget which introduced some changes that got overlooked last year and in 2014.
Bear in mind too, the factors afforded to you (now) with ill health and death provision. If you're young and are going to drop £500,000 into a pension, what's your position in respect of benefit crystallisation events, and your annual and lifetime allowance (will your contribution be made by your company, or by you?)? There are so many other, unique to you, things to consider - no right/wrong answer. I wouldn't focus (overly) on just the here and now.
I will be able to fund the SIPP with a combination of prior years, existing funds and a loan from me to the SIPP. I'm still not sure if there is any difference between the money going into the SIPP as rent or a situation where I own the property, don't charge the company rent (so no unwelcome taxable income) and pay in the same amount as an employers pension contribution.
Cheers
The maximum contribution next tax year including all possible carry forward will be £170,000 and that assumes no pension contributions whatsoever for the three previous tax years.
The maximum the SIPP can borrow is 50% of its value, so if worth £200,000 it can borrow £100,000.
You don't say if the contribution is personal or employer. If personal you can only get tax relief up to the tax you pay in the that year of the contribution, so you would need £170,000 worth of PAYE income, but that in itself causes a problem as you will be caught by the tapered allowance so £170,000 contribution won't be possible.
The figures don't seem to work for purchase via a SIPP.
You seem to have at least £150,000 available though which should be sufficient for a personal/company purchase.
You also seem to have the cash to buy outright if you want.
Maybe a joint purchase between you and the SIPP would be possible.
The maximum the SIPP can borrow is 50% of its value, so if worth £200,000 it can borrow £100,000.
You don't say if the contribution is personal or employer. If personal you can only get tax relief up to the tax you pay in the that year of the contribution, so you would need £170,000 worth of PAYE income, but that in itself causes a problem as you will be caught by the tapered allowance so £170,000 contribution won't be possible.
The figures don't seem to work for purchase via a SIPP.
You seem to have at least £150,000 available though which should be sufficient for a personal/company purchase.
You also seem to have the cash to buy outright if you want.
Maybe a joint purchase between you and the SIPP would be possible.
9005rpm said:
Thanks both for comments, food for thought. Ginge what do you mean about benefits crystallisation events and allowances?
I will be able to fund the SIPP with a combination of prior years, existing funds and a loan from me to the SIPP. I'm still not sure if there is any difference between the money going into the SIPP as rent or a situation where I own the property, don't charge the company rent (so no unwelcome taxable income) and pay in the same amount as an employers pension contribution.
Cheers
Sure, but PM has already neatly touched on it. The rules allow the pension holder (you) to borrow up to 50% of the value of your pension fund to fund a (property) purchase. So, you're falling short anyway. If you add to that, what you want to put in (£500k), then you're going to breach the limits which determine what you can put into your fund each year anyway. I will be able to fund the SIPP with a combination of prior years, existing funds and a loan from me to the SIPP. I'm still not sure if there is any difference between the money going into the SIPP as rent or a situation where I own the property, don't charge the company rent (so no unwelcome taxable income) and pay in the same amount as an employers pension contribution.
Cheers
Benefit Crystalisation Events are moments in time that are triggered when your fund needs to get valued; there are many of them. Your property purchase could do really well (let's say some big house builder needed to buy you out to continue with a housing developement) and gave you, say, £1,500,000 for your office. That then gets paid into your pension fund. If you're in your early forties, what size will that be by the time you decide to take benefits, at, say, 60? Will you have breached the LifeTime Allowance (currently, yes), so what are the likely, probable tax implications of that in 'x' years?
Many investors in SIPP or SSAS do not have sufficient funds to purchase a commercial property outright, if you wanted to buy an office for £500,000, you're looking, realistically, at having a fund already in place of twice that. If you need a trustee to sign this off for you, then they'll still need to be happy it's a suitable investment. Lots of folk overlook that - someone has to put their signature on the document that says it is a good idea for you. Have you asked your adviser for his thoughts on the merits or otherwise, of a pooled or group SIPP? PM makes a very good point, if you have the money already parked in cash, have you taken advice on a binary approach?
I'd strongly scrutineer the exit strategy too. I touched on estate planning, but I f you have a single investment that is tied up as illiquidly as an office, how are you going to take benefits from the scheme if you want to combine retirement and part time work? The guidance surrounding the valuation of tax free cash and income will be fiendishly complex for you; most immediately, who are you going to choose as scheme administrators to cope with it? It won't be your run of the mill provider.. and that means expensive.
Thank you all. I do definitely have enough funds to make the purchase via the SIPP. I've been (deliberately) a little vague on the figures I am quoting, but with the existing funds and prior year contributions plus a loan from my company to the SIPP I can make the figures work.
Jockman, I was interested that you felt the rent (which is market btw) is on the low side. I'm based in the SE. What would you expect to see for a £500k capital outlay?
Ginge, thank also for your comments. I will take these away and discuss with my IFA. The SIPP is being set up especially to make this purchase. Until now the funds have been sitting in a normal DC scheme. If the sale comes off, it will take 3 - 4 years for the SIPP to pay the company back the loan and I will then have a property in a SIPP owned outright but nothing else. The company will then keep paying rent and I will hopefully build up some cash in the SIPP to be invested TBC. I am early 40s.
Cheers.
Jockman, I was interested that you felt the rent (which is market btw) is on the low side. I'm based in the SE. What would you expect to see for a £500k capital outlay?
Ginge, thank also for your comments. I will take these away and discuss with my IFA. The SIPP is being set up especially to make this purchase. Until now the funds have been sitting in a normal DC scheme. If the sale comes off, it will take 3 - 4 years for the SIPP to pay the company back the loan and I will then have a property in a SIPP owned outright but nothing else. The company will then keep paying rent and I will hopefully build up some cash in the SIPP to be invested TBC. I am early 40s.
Cheers.
We just put our £650k manufacturing premises into our SIPPs and the market rent is £80,000pa. Not sure if I'm comparing apples with pears, though.
We did it in 2 stages with a 4 week gap (so I had to act as a trustee) because we did not have enough in our SIPPs. For the sake of round figures, our SIPPs paid our company £325k for half of the premises and we immediately paid this back into the SIPPs by using unused allowances from previous years. The SIPPs then had £325k to buy the other half. So they did.
The rent is a return on investment so does not effect your £40k AIA.
We did it in 2 stages with a 4 week gap (so I had to act as a trustee) because we did not have enough in our SIPPs. For the sake of round figures, our SIPPs paid our company £325k for half of the premises and we immediately paid this back into the SIPPs by using unused allowances from previous years. The SIPPs then had £325k to buy the other half. So they did.
The rent is a return on investment so does not effect your £40k AIA.
Jockman said:
We just put our £650k manufacturing premises into our SIPPs and the market rent is £80,000pa. Not sure if I'm comparing apples with pears, though.
We did it in 2 stages with a 4 week gap (so I had to act as a trustee) because we did not have enough in our SIPPs. For the sake of round figures, our SIPPs paid our company £325k for half of the premises and we immediately paid this back into the SIPPs by using unused allowances from previous years. The SIPPs then had £325k to buy the other half. So they did.
The rent is a return on investment so does not effect your £40k AIA.
Out of interest did the provider and solicitor charge for two separate purchases?We did it in 2 stages with a 4 week gap (so I had to act as a trustee) because we did not have enough in our SIPPs. For the sake of round figures, our SIPPs paid our company £325k for half of the premises and we immediately paid this back into the SIPPs by using unused allowances from previous years. The SIPPs then had £325k to buy the other half. So they did.
The rent is a return on investment so does not effect your £40k AIA.
The legals charged twice but the second time at a much reduced rate as no searches were required and no new Lease was required.
The SIPPs paid 2x half stamp duties and the Company had to pay stamp duty on the Lease due to the size of it - I hadn't realised that.
Suffolk life charged £375 for the 2nd tranche, split between 3 SIPPs.
The SIPPs paid 2x half stamp duties and the Company had to pay stamp duty on the Lease due to the size of it - I hadn't realised that.
Suffolk life charged £375 for the 2nd tranche, split between 3 SIPPs.
PurpleMoonlight said:
That doesn't sound to bad.
You probably could have done it as one transaction with 50% purchase and 50% in-specie contribution, but the end result is of course the same.
Your rent seems huge but no doubt certified by an independent valuation.
They wouldn't permit in-specie - can't remember why.You probably could have done it as one transaction with 50% purchase and 50% in-specie contribution, but the end result is of course the same.
Your rent seems huge but no doubt certified by an independent valuation.
Yeah, the rent is based on an independent valuation.
£7k per month! On a London residential flat of the same value you are looking at £23k pa! Its looks like a great scheme for you mate. I have a SASS with property and that works very well indeed but I had to work hard for 12 months splitting leases and all sorts - really earned my bacon there whilst on a steep learning curve!
Now, to more important matters, what are your wheels these days - lots going on on the AM scene this year
Now, to more important matters, what are your wheels these days - lots going on on the AM scene this year
Ken Figenus said:
Its looks like a great scheme for you mate. I have a SASS with property and that works very well indeed but I had to work hard for 12 months splitting leases and all sorts - really earned my bacon there whilst on a steep learning curve!
Now, to more important matters, what are your wheels these days - lots going on on the AM scene this year
Don't you even think about tempting me into another Aston Now, to more important matters, what are your wheels these days - lots going on on the AM scene this year
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