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Benefits of a SIPP when Negotiating a Merger and/or Acquisition

October 27, 2022

When negotiating a merger and/or acquisition, the effective and efficient transfer of business assets will always be top of mind. While every transaction is unique, this article will only focus on whether it is possible as well as beneficial to separate commercial property and transfer some into a personal pension scheme (SIPP).

 

SIPP – What is it?

Self-Invested Personal Pensions (SIPPs) are subject to the normal rules and regulations for registered pension schemes, but offer the freedom of choice over investment management, whilst keeping the administration in one place. This means that you can change the investment manager when you wish, without incurring the expense of changing the provider of the administration.

Additionally, you can achieve greater flexibility in the benefits you can take during retirement without necessarily having to transfer your funds again. You can choose to buy an annuity or follow the route of phased retirement and / or drawdown pension. There is now no upper age limit at which benefits must be taken.

SIPPs are money purchase schemes with contributions receiving tax relief. An employer may contribute to an individual’s SIPP, but this is not obligatory.

 

Why invest in property via a SIPP?

Pros:

  • Tax free growth (no capital gains tax) as held by a pension arrangement
  • Tax free income (rental) within the pension plan
  • Enables the pension to support the business (and vice versa) where the commercial property is used by the business – the rental income paid by the business is tax deductible in this case
  • Property may be bought jointly with one or more other parties, including other SIPPs

Cons:

  • Lack of liquidity within the pension plan if the property is the only or main asset
  • Could cause issues when a member wishes to draw benefits

 

SIPP Investments

Most types of conventional investments are freely allowed including quoted stocks and shares, unit trusts, insurance policies and commercial property but there are some restrictions designed solely to prevent abuse. Any SIPP holding prohibited assets directly or indirectly will have all tax advantages removed which will broadly mean that it is at least no more helpful to hold such assets in a pension scheme than it is to hold them personally. Prohibited assets include direct or indirect investment in residential property and certain other assets such as fine wines, classic cars, and art and antiques.

 

Pension Lifetime Allowance LTA

Your SIPP is subject to the limitations of LTA. The pension lifetime allowance is best defined as the maximum size you can allow your pension pots to grow to. This limit is currently £1,073,100.

When buying commercial property into a SIPP arrangement, due regard must be given to how the value will affect the LTA of each SIPP member.

 

Purchasing commercial property within a Self-Invested Personal Pension (SIPP)

It is acceptable for a registered pension fund to invest in commercial property and this facility is often the driver behind the setting up of a SIPP arrangement. It is however unacceptable for a pension fund to hold residential property as an asset – and hefty tax penalties will be imposed by HMRC if a registered pension arrangement invests in a property that falls within the residential property definition.

 

Financing the purchase of Commercial Property

The property can be bought using the pension fund (which can include personal, employer and third-party contributions subject to the usual limits and transfers in from other arrangements) or, as is often the case, by a combination of current pension funds and borrowing. A registered pension scheme may borrow funds from any individual, company or financial institution whether or not they are connected to the scheme, but any borrowing from a connected party which is not made on commercial terms will be subject to a tax charge. A registered pension scheme is authorised to borrow an aggregate amount up to 50% of the net value of the fund immediately before the borrowing has taken place. The value of the asset being bought using the borrowing must therefore not be considered when calculating the value of the fund unless, unless it is already held as an asset of the scheme before the borrowing takes place, for example a re-mortgage. Scheme administrators/ trustees must consider any existing borrowing when calculating the limits.

 

This partner piece was written by:

Marcus Bull, Independent Financial Advisor at MHA Caves Wealth – mbull@mhacaves.co.uk 

Robert Butler, Partner at MHA MacIntyre Hudson – robert.butler@mhllp.co.uk

 

Risk Warnings
MHA Caves Wealth is authorised and regulated by the Financial Conduct Authority (FCA), Financial Services Register number 143715.
This communication is for general information only and is not intended to be individual investment advice, a recommendation, tax or legal advice. The views expressed in this article are those of MHA Caves Wealth or its staff and should not be considered as advice or a recommendation to buy, sell or hold a particular investment or product. In particular, the information provided will not address your personal circumstances, objectives, and attitude towards risk.  Therefore, you are recommended to seek professional regulated advice before taking any action.
This Information represents our understanding of current law and HM Revenue & Customs practice as at 27/10/2022. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. You are recommended to seek professional regulated advice before taking any action.

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