Removing Mortgage

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For use by professional advisers and for information purposes only

Opportunity

• An existing vet’s practice is to have its premises revalued by the bank.
• The sole trader, Simon, is concerned that the dip in property prices since the premises were purchased could mean a breach of the covenant on the maximum loan-to-value ratio.
• The bank have indicated that they may seek to renegotiate the terms of the loan (upwards) and ask for personal guarantees should he break the covenants.

Background

• Simon has an existing loan of £80,000 secured on the premises.
• The business is trading profitably and he believes a change in commercial terms is not warranted.
• He is also keen to avoid being forced to link personal assets to the business, and believes that this aggressive stance by the bank is changing the nature of their relationship.

The Solution

• Simon consolidates his pension funds into a SIPP.
• The SIPP fund purchases the practice premises at market value of £120,000.
• From the purchase proceeds, £80,000 repays the bank loan and £40,000 is now available to Simon for his own personal use.
• Simon has no personal Capital Gains Tax to pay as there has been no capital gain on the sale to his SIPP.
• The bank is now taken out of the equation. Simon is not required to pay increased interest rates nor give personal guarantees, and the practice can focus on developing its client relationships.
• The premises are leased back to Simon’s business at the market rental value (£9,600 pa) for a 10-year term, subject to rent reviews every three years.

Additional Benefits

• 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 Simon’s annual contribution limit, so he is also free to make contributions each year up to the annual allowance.