In this article we further explore the benefits of utilising SSAS and borrowing to Purchase Practice Property.
Veterinary Practice Utilises SSAS to Purchase Practice Property
Background
Two partners, Dr. Smith and Dr. Jones, 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
Dr. Smith and Dr. Jones transfer their existing pension funds into the SSAS:
• Dr. Smith: £300,000
• Dr. Jones: £250,000
This gives the SSAS a total of value of £550,000
Property Purchase
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 veterinary 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, Dr. Smith and Dr. Jones successfully purchased their practice property, leveraging their pension funds and 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.
