Office Purchase Flashcards
To consider the purchase of the office they are currently renting
Outline the factors to consider when advising Alan and Lydia on their plans to purchase the office they are currently renting, via suitable pension plans
- Rent of £1,000 per month would still need to be paid to the pensions
- Even when cash flow is an issue
- This will still be a business expense that can be offset against Corporation Tax
- But will not be classed as a pension contribution
- So will not utilise any of their annual allowances
- The property will be illiquid
- Which may cause issues when funds need to be accessed at retirement / age 60 / will need to sell the property if access to funds required at retirement
- Existing group pensions will need to be switched to a SIPP / SSAS
- Which will incur costs / they will be out of the market whilst the switch takes place Property investment high risk
- Which meets their adventurous attitude to risk profile
- But does not match their low capacity for loss
- And may not suit their ethical preferences
- Their pension plans may need to borrow additional funds in order to have sufficient monies to purchase the property
- Further contributions could be made to maximise annual allowances and reduce borrowing requirement
- They have sufficient funds within their existing pensions to support any borrowing required Any borrowing will incur additional costs / will need to be repaid
- Holding property within a pension incurs higher charges / can be complex / more costly Costs will be incurred on purchase / stamp duty / VAT / solicitor’s fees
- The pensions will need to maintain the property / costs of maintaining the property are funded by the pension
Outline to Alan and Lydia six advantages of holding the office property within a SIPP
Advantages
• Rent is not taxable in the SIPP
• Rent paid into the scheme will grow for the benefit of member(s) and does not count
towards members Annual Allowance
• When trustees / administrator sells property there will be no Capital Gains tax
• Property is protected from creditors
• Uses pension savings which is not otherwise accessible
• The property is bought using tax-relieved monies
• Tax relief on contributions paid in to build up the required pension pot
• The pension fund will receive rental income in addition to any pension contributions
• SIPP can borrow 50% of scheme assets, so may not need to use own funds
Outline to Alan and Lydia six disadvantages of holding the office property within a SIPP
Disadvantages
• It is an illiquid investment and may be hard to sell / cannot sell part of a property
• Can be a high percentage of scheme assets thereby reducing diversification
• Higher costs involved for the scheme (i.e. rent reviews, property maintenance)
• Property cannot be used as collateral by the business
• Stamp duty and other costs associated with the purchase of the property by the SIPP
• Void periods / delay in finding a tenant would cause loss of income to the SIPP if property
retained into retirement
• Not on the balance sheet so cannot be used as collateral
Identify and explain the steps that Alan & Lydia will need to take in order for them to acquire their business premises via a pension scheme (14)
- Alan & Lydia will need to switch their existing group personal pension plans into a plan that is allowed to directly hold commercial property
- Can pool SIPPs together / pool into a SSAS to buy as a joint investment
Either 2 x Self-Invested person pensions (SIPPs) or a Small self-administered scheme (SSAS) - They will need to submit a formal offer to buy the premises / pay commercial value
- SIPP / SSAS provider will check that the property would be a qualifying investment / Permitted asset
If accepted, they will need to appoint a solicitor / conveyancer / use one appointed by the schemes / undertake legal requirements themselves - To undertake the legal transfer of the property to the SIPP / SSAS Stamp duty and VAT is likely to be payable
The SIPP / SSAS must hold sufficient assets / £220,000 value required plus costs - Their combined pension savings are insufficient / £175,000 currently in pensions so they will need additional value in their pension(s)
- Further pension contributions / borrowing required to boost the fund value to £220,000 plus costs
- Could utilise annual allowances for this tax year using employed income / net relevant earnings
- Can utilise carry forward to maximise contributions
- Can borrow up to 50% of their pensions net value (£87,500)
- Any loan taken must be from a bank / building society
- SIPP must charge them a market rent / loan repaid from rent paid by AQ Pack Ltd
Alan & Lydia are looking to switch their existing Group Personal Pensions (GPPPs) into a pension that can facilitate the purchase of the business premises. They are considering the merits of either Self-Invested Personal Pensions or a Small Self-Administered Scheme (SSAS). Identify four benefits for each that may influence the recommendation made to them - SIPP 5
SIPP
Cheaper less admin
Two plans autonomy in fund choice more flex
FCA advice prot
SMPI yearly to monitor n link obj
• Cheaper option / less administration / easier to establish
• Individual plans / autonomy in fund choice / more flexible if future needs are different
• Regulatory protection / advice protected by the FCA
• Statutory Money Purchase Illustrations (SMPI) issued annually / easier to monitor and link to
retirement objectives
Alan & Lydia are looking to switch their existing Group Personal Pensions (GPPPs) into a pension that can facilitate the purchase of the business premises. They are considering the merits of either Self-Invested Personal Pensions or a Small Self-Administered Scheme (SSAS). Identify four benefits for each that may influence the recommendation made to them - SSAS 5
SSAS
Joint plan Can be used for AE as occ Reg by TPR Own control / trustees Matches ATR Could lend money to business
• Do not need to establish individual plans / pooled plan / joint solution
• Plan could be used in future for any employees / occupational scheme / can meet auto-
enrolment requirements
• Self-administration / will be trustees / own control / matches ATR
• Could use to lend money to AQ Pack ltd in future / help fund expansion
Alan & Lydia are planning to use their pension plans to help fund the acquisition of their current rented business premises. Explain the factors that would support a recommendation for Self-Invested Personal Pension plans (SIPPs) over a Small Self-Administered Scheme (SSAS) (7)
- Earmarked scheme / individual plans / can choose separate providers / choose separate funds
- Less administration / easier to understand
- Cheaper to establish and monitor
Master trust / no need to be trustees themselves / less ongoing responsibility - Statutory Money Purchase Illustrations (SMPI) issued annually / easier to monitor progress Regulatory protection for any advice / FCA regulated
- Doesn’t affect payroll / Relief at source / Premiums via direct debit
Flexible if circumstances change / on divorce / no formal link to business if business stops
Alan & Lydia are looking to acquire the business premises they currently rent. Briefly describe four advantages and four disadvantages of them buying it without using pensions / retirement plans. Advantages
Advantages
• Individual ownership / own asset / owned by them
• Easier to sell / more straightforward disposal / liquidity
• Less complexity / easier transaction
• Reduced costs / no need for formal financial advice
• No VAT on purchase price
Alan & Lydia are looking to acquire the business premises they currently rent. Briefly describe four advantages and four disadvantages of them buying it without using pensions / retirement plans. (8) Disadvantages
Disadvantages
• Financial assessment on them not the firm / no income / affordability
• Possible CGT on future disposal / taxable growth
• Any rent received is liable to income tax / taxable income / few tax benefits
• Business relief for IHT restricted to 50% / within estate for IHT
• Potentially available for creditors if AQ Pack Ltd has financial difficulty
