In this article we highlight the benefits of utilising SSAS to Purchase Practice Property.
Accountancy Practice Utilises SSAS to Purchase Practice Property
Background
Two partners, David Jones and Chris Davies, run a successful veterinary practice. Following advice from their financial adviser, they decide to purchase the property where their practice operates. A purchase is agreed with the vendor at £650,000. Both partners have substantial pension funds and opt to use a Small Self-Administered Scheme (SSAS) to facilitate the purchase.
Pension Fund Transfer
David and Chris transfer their existing pension funds into the SSAS:
• David: £300,000
• Chris: £250,000
This gives the SSAS a total of value of £550,000.
Property Purchase and Borrowing
The property is valued at £650,000, so the SSAS needs an additional £100,000 to complete the purchase. SSAS rules allow borrowing up to 50% of the net asset value of the SSAS.
In this case, the SSAS can borrow up to £275,000 (50% of £550,000), which is more than sufficient to cover the shortfall.
The SSAS borrows £100,000 from a commercial lender under standard commercial terms secured against the property.
Purchase Process
1. Valuation: A RICS-approved surveyor concludes that the property is in a good state of repair and values the property at £650,000 with an annual rental of £70,000.
2. Legal and Administrative Work: Solicitors handle the legal aspects of the purchase, ensuring compliance with regulations.
3. Completion: The SSAS purchases the property for £650,000, funded by the £550,000 from the pension transfers and the £100,000 loan.
Leasing Back to the Partnership
The property is then leased back by the SSAS to the accountancy practice at an annual rent of £70,000 (market rate). This arrangement provides several benefits:
• Tax Efficiency: Rental income received by the SSAS is tax-free, and the practice can deduct rental payments as a business expense.
• Borrowing Repayments: Part of the rental payment is used to repay the borrowing whilst leaving an element for further investment.
• Retirement Planning: The partners’ pension funds are invested in a tangible asset, potentially appreciating in value over time.
• Business Stability: Holding the property within the SSAS ensures long-term stability for the practice, avoiding potential issues with landlords or creditors should the practice ever get into difficulties
Conclusion
By utilising a SSAS, David and Chris successfully purchased their practice property, leveraging their pension funds and a commercial loan. This strategic move not only secures their business premises but also enhances their retirement planning through a tax-efficient investment.
This case study is also available as a downloadable pdf here.
