SIPPs and SSASs Flashcards

1
Q

FactFind: Ltd co. owns premises, £540K. SIPP £250K Cash £220K Aims to Expand business.
State seven benefits and seven drawbacks to Dan and his business of Dan’s SIPP buying and owning the company’s business premises. (14 marks).

A

Seven from the following benefits:
• 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 rent paid by the Ltd company to the SIPP is a business expense for the purposes of corporation tax.
• No tax payable on rental income received by the SIPP.
• No CGT/corporation tax payable on future sale of the business premises by the SIPP.
• The property is protected from creditors.
• Proceeds of the property sale to the SIPP will provide funds to the company to use towards any other business needs.
• The pension fund will receive rental income in addition to any pension contributions.
• Rent does not count towards the member’s annual allowance.
• It saves Dan having to find the capital to purchase the property.

Seven from the following drawbacks:
• Using a large part of the pension fund to purchase and own the property will reduce liquidity to provide benefits at retirement.
• Lack of diversification.
• Company will have to pay a commercial rent.
• Potential tax on sale of the property to the SIPP.
• Stamp duty and other costs associated with the purchase of the property by the SIPP.
• Higher ongoing administrative costs and complexity.
• If the business fails there could be a delay in finding a tenant and loss of income to the SIPP.
• Company will not be able to secure borrowing against the property in future.
• Lower maximum borrowing percentage than with personal borrowing.

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2
Q

FactFind: Ltd co. owns premises, £540K. SIPP £250K Cash £220K Aims to Expand business.
If the maximum amount is borrowed by Dan’s SIPP in order to purchase his company’s premises, calculate showing all your workings, the additional gross pension contribution required to allow the purchase to go ahead immediately. (6 marks).

A
  • The SIPP would be allowed to borrow up to 50% (1) of the net value of the scheme. (1)
  • Amount required to purchase property is £540,000.
  • Fund required assuming maximum borrowing is £540,000 x 2/3 = £360,000 /£540,000/1.5 = £360,000.
  • Deduct existing fund value of £250,000.
  • Contribution required is £110,000 gross.
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3
Q

FactFind: Ltd co. owns premises, £540K. SIPP £250K Cash £220K Aims to Expand business.
Outline six costs either initial or ongoing that are likely to be incurred by either Dan or the SIPP in purchasing the company premises. (6 marks).

A
Six from the following:
• Legal/solicitor’s fees.
• Surveyor/valuation fees.
• Stamp duty.
• Searches/land registry fees.
• Mortgage administration/arrangement fee.
• Possible VAT.
• Property management costs.
• Financial advice charges.
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4
Q

FactFind: Ltd co. owns premises, £540K. SIPP £250K Cash £220K Aims to Expand business.
State seven possible benefits to Dan if he purchases the premises in his own name and rents it to the company. (7 marks)

A
  • The maximum percentage of the property purchase price that Dan can borrow is higher than would be the case if the property was purchased by the SIPP.
  • Dan will obtain rental income / a national insurance efficient way of taking ‘income’ from the business.
  • He can use the property as security for personal loans.
  • The premises will be separate to other company assets / there is no business risk.
  • Business Relief (1) and Entrepreneur’s Relief (1) should be available as it is used within the business.
  • The property will not need to be sold when he retires.
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5
Q

FactFind: 2 guys; Directors of W Ltd & sole members of SSAS FV £312K o/s loan of £40K. (merits of SSAS purchasing shares in W Ltd OR making a loan to W Ltd to purchase new business premises)

Explain the rules regarding a purchase of shares in Widget Engineering Ltd by the SSAS. (5 marks)

A
  • The small self-administered scheme (SSAS) can only invest less than 5% of the scheme’s assets in Widget Engineering Ltd.
  • The percentage is calculated at the time the scheme pays for the shares (1) and is not re-tested later, (1) unless new shares in Widget Engineering Ltd are acquired. (1)
  • There are no restrictions on the percentage of shares that can be held in the company.
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6
Q

FactFind: 2 guys; Directors of W Ltd & sole members of SSAS FV £312K o/s loan of £40K. (merits of SSAS purchasing shares in W Ltd OR making a loan to W Ltd to purchase new business premises)

Calculate, showing all your workings, the maximum amount the SSAS can lend to the business if Widget Engineering Ltd were to purchase new business premises using a loan from the SSAS. (7 marks)

A
  • The loan cannot exceed 50% of the net value of the scheme’s assets at the date the loan is granted
  • Value of SSAS = £312,000
  • Less outstanding loans = £40,000
  • Net Value of the scheme’s assets = £272,000
  • Maximum borrowing = £272,000 x 50% (1) = £136,000 (1)
  • Total amount available for the property purchase = £272,000 + £136,000 = £408,000
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7
Q

Calculate, showing all your workings, the maximum amount the SSAS can lend to the business if Widget Engineering Ltd were to purchase new business premises using a loan from the SSAS.

Outline the conditions that would have to be met if such a loan were to be allowable (11 marks)

A
  • The loan must be for a genuine commercial purpose (1) and cannot be more than 50% of the net scheme assets. (1)
  • The property must be secured as a first charge (1) on assets greater or equal to the value of the loan. (1)
  • Interest rate of at least 1% (1) over the average base rate of the six main clearing banks (1) rounded up to the nearest 0.25%. (1)
  • The loan cannot last for longer than 5 years (1) although can be rolled over once. (1)
  • It must be repaid at least annually (1) in equal instalments of capital and interest. (1)
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8
Q

SIPPs

A

available through platforms
can hold directly traded shares/bonds
greater flexibility than a PPP/SHP

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9
Q

SIPP charges

A

may be higher than PPP/SHPs

  • set up fees
  • property fees
  • annual admin fees
  • fund charges etc
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10
Q

SSAS Vs SIPP

A
  • SSASs are occupational scheme / individual trusts
  • SIPPs are contract-based plans (personal) / master trust
  • SSASs are aimed at Co.Directors/Senior Employees - eligibility requirement more restricted than SIPPs
  • SSASs are regulated by a separate body - The Pensions Regular (TPR)
  • SSASs has more restrictions in terms of investing in the sponsoring employer than the SIPPs
  • SSAS - one investment pot / SIPPs - earmarked
  • SSAS - contributions & benefits are non earmarked / SIPP - earmarked
  • SSAS - net pay method / SIPP - relief at source method
  • SSAS - collective investment choices made by ALL Trustees / SIPP - investment choice made by Member
  • SSAS - no need for a Statutory Money Purchase Illustration (SMPI) / SIPP - SMPI is required
  • Both has ability to borrow for investment & to invest in commercial property
  • Membership is Restricted for SSASs but open for SIPPs
  • Both offer PCLS, annuity, FAD, UFPLS, but in addition SSAS also offer scheme pensions
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11
Q

SSASs

A

a self-administered scheme <12 member, all trustees
usually defined contribution
can lend to sponsoring employer

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12
Q

SSASs and SIPPs - self investment options include, investment into:

differences - SSAS ‘can’ loan to a sponsoring employer whereas a SIPP can’t as it doesn’t HAVE a sponsoring employer and is set up under a contract

A
  • FCA authorised or recognised collective funds
  • Securities listed on a recognised stock exchange
  • Unlisted shares
  • Commercial property
  • Bank deposits
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13
Q

SSAS and SIPP - taxable property

A
  • Residential property and related land
  • A beach hut
  • Timeshare accommodation
  • Multi-dwelling house let to students
  • Ground rent
  • Tangible moveable property (art, antiques, jewellery, fine wine, boats, classic and vintage cars, stamp collections, rare books)
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14
Q

SSAS and SIPP - permitted investments (non-taxable property)

A
  • Children’s homes
  • Halls of residence
  • Hospices
  • Prisons
  • Hotels (if owned in its entirety)
  • Caretakers flat
  • Investment grade gold bullion
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15
Q

Investment in Sponsoring Companies

A

SIPPs do not have a limit when investing in Sponsoring Companies (but beware of ‘indirect investment’ rules)

SSASs can only ‘Self-Invest’ up to a maximum:
•up to 5% of Scheme Assets in any one sponsoring employer
up to 20% of Scheme Assets where shareholdings relate to >one sponsoring employer

% at time payment into the shares are made

no restrictions on % of shares held in one company

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16
Q

Loans to Sponsoring Employers (via SSASs)

A

must not exceed 50% of the net value of the scheme’s assets at the date of the loan
the net value of the scheme assets is the total of:
- market value of the member and dependants DD pension funds PLUS
- the value of each scheme pension or (inc dependants) PLUS
- the value of the uncrystallised rights MINUS
- any outstanding loans

MUST BE FOR A GENUINE Commercial purpose
MUST BE SECURED as a First Charge on assets >or= to the value of the loan
Int rate >= 1% over ave. base rate of 6 main clearing banks rounded up to nearest 0.25%
<= 5yrs, although can be rolled over once
MUST BE REPAID at least Annually in equal instalments of capital and interest for each complete year of the loan

17
Q

Property Investment - Benefits

A
  • The rent itself, paid by the employer, is a business expense for tax purposes (so tax relief can be claimed)
  • The rent itself is not taxable once its in the SSAS/SIPP and grows free of any income tax or capital gains tax
  • The rent is not a ‘contribution’ it grows for the benefit of the member but doesn’t count towards member’s AA
  • When trustees/administrator sells property there will be no CGT
  • The property itself is protected from credits, for bankruptcy and insolvency
  • Frees up working capital
  • 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
18
Q

Property Investment - Drawbacks

A
  • It is an illiquid investment and may be hard to sell/cannot sell part of a property
  • Can be a high % of scheme assets thereby reducing diversification
  • The employer must pay a commercial rent
  • High costs involved for the scheme (i.e. rent reviews, property maintenance)
  • Property cannot be used as collateral by the company.
  • Potential CGT on sale of the property to the SIPP
  • Stamp duty and other costs associated with the purchase of the property by the scheme
  • If the business fails there could be a delay in finding a tenant and loss of income to the SSAS/SIPP
  • Lower overall borrowing %
19
Q

Borrowing by a Scheme (available via SSAS and SIPPs)

Example

A
  • Loan must NOT exceed 50% of the net scheme assets at the date of the loan
  • The value of the net scheme assets is the same as for lending

EG no existing borrowing, scheme value £400K
calc £400K x 50% = £200K

EG with existing borrowing, £400K o/s borrowing £50K
calc [(£400K - £50K) x 50%] - £50K = £125K (don’t forget to take off the existing borrowing TWICE)