THE OTHER SIDE OF SIPPs
Much is appearing in the press at the moment about SIPPs – Self Invested Personal Pensions, (to acquire a commercial property). Many clients speak to me about these and from the conversations it is very clear that they only get half of the story.
This is how it works. Your pension fund acquires a business asset – usually your practice, - borrowing money as required. You pay rent to use the premises, claiming this as a tax deduction. The rent received by the pension fund is used to pay off any borrowings plus all other expenses of running the property. Your pension fund cannot buy the premises from you.
On retirement the building is sold, with the capital gain being exempt from tax. You can then take 25% of the value as a tax-free cash sum, with the balance being used to possibly fund an annuity.
Using numbers. Say the building is bought by the pension fund for £200,000. You retire in 20 years, and the building is sold for £1m. You can then take £250,000 tax free, with the balance funding your pension income by possibly purchasing an annuity. When you die, your spouse (or other nominated person) may then receive a reduced pension, if this was selected at outset. If this was not selected, then on your death all payments under the annuity would cease and no more monies would be returned to your estate.
If you had made the election, then the annuity payments would cease on their death and again no monies would be returned to their estate.
Now compare this to owning the building personally. You buy it for £200,000 and at a later date, sell it for £1m as before. You do not have the tax-free advantages enjoyed by the pension fund and therefore the gain of £800,000 is liable to capital gains tax.
As the building is a business asset, under current legislation, you are entitled to 75% taper relief. Therefore you are charged tax on £200,000, giving a maximum liability of £80,000. The rest of the £920,000 is yours to do with what you want. This could, of course, include buying an annuity!
Under this second scenario you would not have received a deduction for the rent paid for the premises. However, you would have received relief on the interest on any loan taken to purchase the building.
No account has been taken of the charges associated in setting up and maintaining the SIPP arrangements, but these would reduce the fund during the life of the arrangements.
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Michael B Bennett FCCA
212 Ballards Lane
Finchley
N3 2LX
Tel 020 8445 7667
With grateful thanks to Laurence Thorne IFA, Bond & Stein