Simon, John, David and Gregg * are four directors/shareholders in a medium sized manufacturing company, which like many firms has seen both the good times in business and the not so good.
Business in the last few years, though, had been especially good. Their previous accountant and Independent Financial adviser (IFA) had wisely encouraged them to make some fairly large pension contributions to reduce the company’s overall corporation tax bill. This would also help build a retirement nest egg for them all as directors.
Due to the increase in business and the specialist nature of the company, there had been some fairly rapid growth and as a result further premises were required, costing just under £1million.
The trading conditions of previous years, though, meant the company did not have large cash reserves, and those it did have were required to fund continued growth. The challenge the directors faced, therefore, was how to fund almost £1million for the build or acquisition of a commercial property, without renting from a third party, which they viewed as just dead money.
They approached the company’s bank, which was in fact willing to consider the lending, but with a great deal of personal guarantees and other caveats.
At this point, Simon, John, David and Gregg came to Ring Associates to see if there was a better alternative than borrowing from the bank or renting from a third party.
Each of the directors had in excess of £250,000 in their respective pension pots, which was invested in general insurance funds and ‘normal’ pensions.
Following an initial meeting with Adrian at Ring Associates, he suggested that the directors should consider purchasing the premises with a self invested pension either owned individually or as a group small self-administered pension scheme (SSAS).
All four directors felt that their traditional pensions were OK but not really working for them as well as they could so it was agreed that the pensions should be used to help fund the purchase of the property.
The pension fund was duly established as a SSAS and the directors’ pensions were moved into one pot. This had sufficient funds in it to purchase the factory premises with very little need of further borrowing from the bank.
As the Ltd company was renting the property off the pension at the going rate, it also counted as a deductible business expense. The rent effectively funded the pensions’ investment growth and any growth in the value of the property was free of any income or Capital Gains tax (more advantageous than if owned by the directors personally or by the Ltd Company).
Since the purchase one director has retired and now takes his ¼ of the rent as his pension at approx. £25,000 per annum whilst still holding ¼ of the factory premises. Another director summed up the experience like this;
“We had looked at all the options and they seemed to mean a large amount of borrowing and a lot of jumping through hoops. Using the pension hadn’t occurred to us but it was a lot easier than we had thought. Using what effectively was our money to buy the factory just made perfect sense – and saved tax which is always nice.”
Renting from 3rd parties is often seen as dead money – unless of course you and your pension are that 3rd party and are the ones to benefit! If you’d like to explore some proactive ways to use your pension, do get in touch.
*Names have been changed