Why invest in a SIPP - The Insider
A SIPP does not rely on the investment choice of only one product provider. It is an empty box, or wrapper, containing any investment approved by HM Revenue and Customs for pension purposes. By using a SIPP wrapper you are free to choose the most suitable investment medium for your circumstances. This will allow you to take advantage of the whole market, with very little restriction.
The following Case Study demonstrates how Chartwell helped some long-standing clients benefit from owning their business premises within their SIPPs.
The Situation
Mr and Mrs Smith* approached Chartwell to review their pension arrangements to establish if there was a way they could release a lump sum to fund the development of their main residence.
Mr and Mrs Smith are directors and shareholders of their own business. They own the business premises that they operate out of which is valued at £150k. They acquired the premises for £100k. There are no borrowings on the property.
Mr and Mrs Smith have been contributing into two personal pensions which have been accumulating over a number of years and are valued at £120k. Both clients are higher rate tax payers (for recent tax changes please see our News page).
Our Proposal
In order to meet their requirements for a lump sum, it was proposed that the clients sell the business premises into two new SIPPs. The reason for each client holding a SIPP of their own is that joint SIPPs cannot be held and the pension funds were split equally between the two of them.
Establishing the Steps to take
It was agreed that the clients should transfer the existing pension funds into the new SIPPS. Then it was proposed that a single employer pension contribution for £40k gross was made into the SIPP to cover the shortfall in buying the property, the cost of setting up the SIPP and conveyancing fees.
The property was then sold to the SIPPs. The clients received the proceeds of £150k. This gave them a profit, after pension contributions and Capital Gains Tax, of £112,456 to meet the costs of redeveloping their property.
The Result
The business premises is now owned by their SIPPs and in addition, there is a rental income of £12k payable
to the SIPPs which in effect, replaces the pension contributions the clients were previously making. The Benefits of owning a Business Premises in SIPPs: -
- Property value grows in a capital gains tax-free environment.
- Property can be sold at any time free of tax within the SIPP.
- Rent paid into the SIPP grows tax-free. Rent is a trading expense so tax relief is received on the rent payments.
- No stamp duty on purchases below the £150k threshold.
- Setting up a lease on the property allows the trading business to be sold in the future with the pension continuing to receive rent from the new owners.
- Rental income can be used as retirement income once benefits are taken from the SIPP in retirement from age 55.
Important things to note
- Active management & investment expertise are needed for a SIPP.
- Charges may be higher than for a personal pension or stakeholder plan.
- Commercial property may be illiquid at certain times.
If you would like to know more about SIPPs and the advantages they can provide, you can contact us at Chartwell on 01225 448732 for more information.
* in this article names have been changed for privacy purposes
