Example case study: Family SIPP
Please note this case study is not based on real life events and is intended to demonstrate how a SIPP can be used in a specific scenario.
Before such a transaction is entered into we would recommend that advice is taken from a suitably qualified Independent Financial Adviser.
John and Jack are brothers, and are equal partners in a very successful solicitor’s practice in Nottingham.
They currently rent the serviced office accommodation which the practice occupies in Nottingham’s historical Lace Market area, but are keen to buy their own offices as they feel that the monthly rent is ‘dead’ money, they have also had problems with their landlord over some much needed repairs, which have not been undertaken.
John and Jack’s wives both work for the practice as part time Solicitors, and in addition to the four of them there are two other salaried solicitors and four administrators as well as an accounts clerk.
John and Jack are keen to move to a building which can accommodate their current levels of staff but also cope with their expansion plans, which will see the practice grow in size of the coming years.
John and Jack both earn £120,000 each year from the business, with their wives, Jane and Jill, on around half of that amount.
Walking to work one day John sees a property which has come on to the market and would be perfect for their needs. He calls the agent and discovers it has 3,000 square foot, has been recently refurbished, is on the market for £240,000 and the owner is keen to sell.
John reports his finding to Jack, who is instantly keen to buy the property, but cautious, as he reminds John that all the spare money the practice has is earmarked for expansion plans.
Nevertheless, being positive people, John and Jack believe that there must be away to secure the property. So they, along with Jane and Jill book an appointment to see their Independent Financial Advice, David Smith, who is also based just around the corner in the Lace Market area of Nottingham.
At the meeting John and Jack explain about the office to their IFA, their passion to buy the property is clear, but it is equally important that they expand the business and they do not want to commit the businesses’ working capital to any other purpose.
David listens hard; he is keen to help but understands that the working capital is earmarked for business expansion.
He asks the four lawyers about their personal finances and whether they have any investments, for example Individual Savings Accounts (ISAs) which could be used. Unfortunately the answer from both couples is “no”, whilst emergency funds are in place, all spare income gets used on school fees and savings to put their children through University.
David knows the finances of both couples well, he set up SIPPs (Self Invested Personal Pensions) for all four of them a few years ago, and up until 2008 they were invested with a stockbroker. Since the credit crunch the capital has been moved to a range of deposit accounts for SIPPs to protect it from the volatile stock market.
David explains commercial property is an acceptable SIPP investment that the SIPPs could be grouped together under one ‘Family SIPP’ umbrella and then used to buy the property.
David looks at valuations for the four SIPPs and see’s that John and Jack’s SIPPs are both worth £80,000 with Jane and Jill’s plans both with £60,000 each, a total of £280,000.
David explains that each of the four of them will still have individual plans, but that they will be grouped under a ‘Family SIPP’ arrangement, with John and Jack each owning 28.57% of the building, assuming the purchase price is £240,000, with the balance split between Jane and Jill.
David explains more about SIPP rules as well as the advantages and disadvantages of owning a property in a SIPP, the costs of the ‘Family SIPP’ arrangement, and that the business must pay a market rent to the SIPPs.
All four love the idea that David has come up with and they part agreeing to open negotiations with the agent whilst David looks further into the costs of arranging the ‘Family SIPP’ and whether or not they should stay with their existing SIPP provider or use an alternative SIPP provider.
A couple of days later the four solicitors meet David again.
Things have progressed rapidly and a price has been agreed. David also has good news to report, the existing SIPP providers offer a ‘Family SIPP’ arrangement and the fees for a property purchase are as low as other SIPP providers he has looked at.
The rest of the meeting is spent discussing how the purchase will work, David confirms again the advantages and disadvantages of owning a property in a SIPP, confirms the costs and asks John, Jack, Jill and Jane whether they would like to proceed; unsurprisingly they do.
Solicitors are appointed to oversee the purchase and within six weeks the purchase has been completed.
A few short weeks later the four happy solicitors, along with the rest of their staff
Using their existing SIPPs, and moving them to one ‘Family SIPP’ arrangement the four business owners have found a way to buy their new businesses.
They didn’t need to use any of the capital held by their business, therefore expansion plans were not affected, and their personal finances were also left untouched.
There are of course advantages and disadvantages to buying a property in a pension and these should be weighed up carefully before any purchase takes place.
If you would like to learn more about how a ‘Family SIPP’ could work for you, or more about property purchase in a pension then speak to one of our team of highly qualified and experienced Financial planners on 0115 933 8433 or email email@example.com