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The husband and wife team want to put down roots and grow their business
A couple who run a business from their rented home contacted us for help. They had the opportunity to expand the business into adjoining land and needed help to navigate the way forward.
The background story
Mick and Sandy run a wellness centre from their home, which they rent, and had the opportunity to take on the land behind the house. This would allow them to expand their service and make space to provide client services.
They approached their landlord and asked if he would sell the house they were living in together with the land at the back of their house. After the usual back-and-forth negotiations, he agreed to sell.
Mick and Sandy wanted to find the best way to purchase the house and the land. They went to lots of different advisers. Although the advisers seemed to say all the right things, they didn’t have the experience to get the job done.
The idea was to use a small self-administered scheme (SSAS) to buy the land. But when you delve into the detail, it gets complicated.
Most advisers do one property and pension deal in their life, we’ve done 4 this year
A SSAS is a pension scheme set up by a limited company. They can be used to benefit the owner, company directors, and family members who are also involved in the business.
Members of the SSAS are appointed as trustees and have control and flexibility over the assets and pension investments. If all members are trustees, as in Mick and Sandy’s case, the SSAS scheme benefits from many exemptions from pension legislation of other pension schemes, allowing greater investment opportunities and fewer administrative requirements.
A SSAS must be registered with HMRC and gets all the usual tax reliefs, including:
- Tax-deductible contributions
- No income tax charge on allowable investments
- No capital gains tax on disposal of investments
- A tax-free lump sum on retirement
- Tax-free death benefits as a pension or a lump sum on death before age 75.
Using a SSAS to buy the commercial land
Although commercial property can be purchased through a SIPP or SASS, the SASS provides much greater flexibility when assessing purchasing options.
A SASS provides the ability to loan back to the company for up to 50% of the assets held within. In addition, a SASS allows multiple members/directors to come together in one arrangement to pool their pensions to collectively purchase an asset.
Once set up, Mick and Sandy could use their SSAS to purchase the land but needed a separate loan to buy their home.
The house and the land combined cost £575,000, this equates to:
- £400,000 for the house and garden which they are currently renting
- £175,000 for the land behind the house.
To reduce the amount of money Mick and Sandy would need to borrow, they wanted to use existing assets:
- £110,000 cash in the business
- £200,000 in Mick’s pension, an active employer’s scheme. The scheme would allow him to transfer a proportion of the assets into the SASS whilst remaining a member and continue to benefit from contributions.
The plan was to use the money in the business as the deposit for the residential house and Mick’s pension to help buy the land.
The first step was to set up the SSAS. But another immediate issue was the mortgage they needed.
Solving problems one step at a time
Because Mick and Sandy were using their main residence for majority business purposes, they had to get a commercial mortgage, which comes with far higher interest rates.
Before I started working with them, they had approval for a 70% commercial loan, which covered the full amount needed to purchase the house and the land. The problem was, if they wanted to use the pension to purchase the land, they couldn’t combine the house and land as one, since you’re not allowed to purchase a residential property with a pension.
Commercial property is classed as buildings or land intended for business purposes and profit-making.
So, we needed to split the title and separate the land from the house. We then had to go back to the mortgage lender, explain the changes to the title and ask for re-approval.
With approval from the mortgage lender, the plan is to:
- Use Mick’s pension money (now in a SSAS) to purchase the land
- Use the cash in the business and the loan to buy the home and garden.
This is a sound plan, but there’s still a small shortfall.
Making all the ends meet
The SSAS allows you to loan up 50% of its value back to the company. So we can use the SSAS to make up the shortfall.
The plan is to loan the money back from the SSAS. The loan must meet certain criteria, the key one being a first legal charge over an asset equal to the loan amount plus the interest.
In this case, the business was able to provide the SSAS with a first legal charge on a property.
Benefits of using the SSAS to loan money back to the business
- It reduces the cost of the loan. The interest rate on the commercial loan is 6.99% but by using the SSAS to loan, or even part loan some of the money, we can get that interest rate down by about 2.5% over base. I expect this to come in a little under 3%, which will save a lot of cash each month.
- It can be a more flexible way to borrow. While borrowing from the SSAS needs to be done properly, and at arm’s length, you don’t have a mortgage lender breathing down your neck, or the associated fees of dealing with a bank.
This is where we’re currently at.
The pressure is on
For the client, this whole process started 18 months ago. Although they only came to us for help six weeks ago, the landlord who is selling the land and house is eager for the deal to be done.
We’re in contact with the solicitor and the mortgage lender and are working hard to keep the sale on track.
Once complete, Mick and Sandy will own the property and have enough land to expand their business and cater for their clients.
They will no longer be paying rent on their house. And, for a few months, will have the benefit of rent from the current tenant of the land once the sale is complete.
When that tenancy agreement ends, Mick and Sandy will pay rent on the land from the company directly to their SSAS. This, alongside the loan repayments from the business, will increase the pension pot value. A further advantage is that the rent doesn’t count towards their annual allowance.
With the ability to expand the business, the hope is that their income will also grow, and they can start to pay more into their pension. Therefore, reducing the debt and the commercial loans faster.
The SSAS now owns the land outright and the £175,000 paid to the business can be used to repay the commercial loan or used for cashflow purposes in the business.
Mick and Sandy own a flourishing business and have two great assets in the house and land.
If you’d like to learn more about how we can help you borrow from your pension or want to find out more about how we can help you grow your business, get in touch. Email email@example.com or call 020 7467 2700.
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