For use by professional advisers and for information purposes only
David is a pharmacist who has managed a successful practice for over 10 years.
He now has an opportunity to open a second branch, and believes now is a good time to expand.
However, he wants to preserve his cash for business cash flow as much as possible. He would also like to minimise any bank’s influence over his business.
David has already negotiated the price for the premises down to £100,000.
To bring the premises up to the same standard as his existing practice will cost a further £25,000.
He has pension plans accumulated through the years from various sources worth £200,000.
Subject to advice, David transfers his existing pensions to a SIPP.
The consolidated SIPP fund purchases the new practice premises at the market value of £100,000.
However, David is also aware that the £25,000 works still need to be covered.
The surveyor confirms that £10,000 of the costs relate to bringing the facilities up to a modern standard and would be considered as landlord works. This can be funded by his SIPP.
The additional £15,000 of fitting costs relate to adaptations specifically needed for a pharmacy. These cannot be covered by the SIPP, as they are deemed client-tailoring costs.
David, or his business, will need to fund the £15,000 tailoring costs.
As David is over 55, he crystallises £60,000 of his pension to release £15,000 tax-free cash needed to fund the £15,000 tailoring costs. Of course, he is not obliged to draw any income at this stage
David’s SIPP now owns his second branch. The premises are leased back to the business at the market value rent (£9,000 pa). He only had to fund £15,000 personally to complete the refurbishment (using his tax free cash). There is no bank involved in the financing and no personal guarantees.
The premises now held in the SIPP fund will attract no Capital Gains Tax if they are sold.
The rent now accumulates in the SIPP fund, free of income tax, and is available for investment.
The rental income does not impact on David’s annual contribution limit, so he is also free to make contributions each year up to the annual allowance.