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Buying a business using SIPP & SSAS pension schemes

Can your client’s pension help them buy a business? Jeff Steedman, head of Business Development, Xafinity SIPP & SSAS, looks at the process and the pros and cons involved

Business owners seeking to expand often spot opportunities to buy a rival firm or enter into a new market.  Small and medium sized companies are bought every week in the UK and in most cases, the company will turn to the bank for finance but there may be a more tax-efficient way of achieving these business expansion goals.

Buying a business and the trading premises

Often, the seller of the business is looking for a specific price and this is usually split into two main parts:

1. The “good will” of the business, customer data, etc.

2. The property from which the business trades, plant, machinery and other tangible assets

Clearly the business premises can hold very material value and any potential purchaser should be taking a close look at the property value.

Where a pension scheme can help

If the buyers have existing pensions, they should explore purchasing the property using pension fund money and using company cash/or borrowing to finance the purchase of the remaining assets.

Using pension funds for the property part of the transaction should mean the company itself will not have to find as much money, thus relieving some strain on the company finances.

To be clear, a pension scheme cannot buy anything that is moveable and it cannot trade.  Therefore, a SIPP or a SSAS cannot buy the good will of a business or any items such as stock, equipment etc., it can only buy the ‘bricks and mortar’.

Valuation process

The purchaser will want to undertake full due diligence of the business and should enlist the professional help of an accountant to review the company finances and gauge its true value.  In terms of the trading premises, the purchaser should appoint a RICS approved property surveyor to survey the premises and provide a valuation.

This information can be used by the purchaser to negotiate the best possible price.  It is worth noting that the SIPP provider will likely require a valuation to support the purchase price to evidence that it has been valued independently of the whole transaction.  An independent valuation will be a necessity if the purchase is part of a “connected party” transaction so as to evidence that a fair market value is being used by the SIPP and no tax charges are incurred by the pension scheme.  A “connected party” transaction is where the buyer and seller have a connection (such as the member being a director of the company selling the property to the SIPP).

SIPP & SSAS pension schemes

Both these pension vehicles can buy commercial property and the other key points to note are:

• Multiple individuals can join their pension funds together to buy the property

• New pension contributions can be paid to top up existing pensions

• Both SIPP and SSAS can borrow funds from a bank to help finance the purchase

• New members can be introduced at a later date and retiring members can exit

• In most cases both schemes can “opt to VAT” – this making all transactions VAT neutral.

Pros and cons of owing commercial property in a pension

Every property is different and every client has a different taxation status, but the pros and cons of using pension funds to buy commercial property are typically:

Pros

• A good tenant can lead to excellent rental income

• Rent paid to a SIPP or SSAS is received tax free in the pension – it is not taxed like income

• No Capital Gains Tax (CGT) to pay when property is sold by the scheme

• Directors and family members can club their pensions together to buy property

• SIPPs and SSASs can borrow money to finance a purchase

• Rental payments are not part of the “Annual (contribution) Allowance” – currently £40k as rental is “growth” on the pension asset

Cons

• Capital value of property may fall

• There may not always be a tenant leasing the property

• There are SIPP, legal and surveyor fees to pay

• Property may need to be sold quickly to realise funds if funds are unexpectedly required for drawdown / death payments.

Starting point for financial advisers / accountants

1. Talk to your clients about pensions – ensure that pension schemes are regularly reviewed, and understand any charges/penalties should they be transferred into a SIPP or a SSAS.

2. Inform and educate them about SIPPs and SSASs and how they can buy commercial property

3. If any potential deals are being lined up, talk to them about how their pension plans can assist in a wider business deal

4. Engage with a professional SSAS / SIPP provider to review the client’s proposals, carry out due diligence on the property and review the financial proposals for any property purchase

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