When to use a Members' Voluntary Liquidation to close a company
SPONSORED: A Members' Voluntary Liquidation (MVL) is as a formal process that allows the directors of solvent companies...
READ MORE
The primary purpose of pension arrangements is to provide an income in retirement. But what about where the assets held in a pension scheme are primarily illiquid, for example holdings in direct property? To provide a more tax efficient avenue to meet income planning requirements, a pension scheme’s ability to borrow could provide a solution.
A real-life example is best to illustrate this.
Brothers Max and Dean have recently wound up their business after many successful years of trading. This was partly spurred on by concerns raised in their sector following the onset of the pandemic, but more so by a desire not to return to full time employment.
Throughout their working careers, the brothers had proactively made tax-relievable pension contributions from the business. Investment growth accrued which further increased the value of the pension scheme. The scheme, a multi-member self-invested personal pension (SIPP), owned a commercial property, tenanted by the brothers’ business and the rent payments constituted the primary investment return.
This approach had provided a tax-efficient solution for the brothers in a number of ways:
At the point of company wind-up, the brothers had each accrued a fund value of £350,000. Alongside their own business premises where they were previously the sitting tenants, with new tenants subsequently found, the SIPP also owned an additional commercial property, tenanted to a separate unconnected party at a commercial rate of rent.
The total SIPP holdings were as follows:
Following the wind-up of the business (i.e. no sale proceeds), the brothers approached their financial adviser in search of a retirement income of £30,000 net each per annum, in the knowledge that the pension scheme’s cash reserves would quickly deplete without further planning.
The brothers also held, jointly and personally, a third commercial premises valued at £500,000 and the adviser considered how this could be incorporated into their income planning.
A pension scheme is able to borrow up to 50% of its net asset value (NAV); in this instance, with a NAV of £700,000, the maximum available borrowing was £350,000.
The agreed planning was for the scheme to borrow this value from the brothers on the basis that the subsequent repayments would meet their income requirements. The required £350,000 was not available in cash but the adviser suggested the property they held personally be used in lieu. In practical terms, the SIPP would purchase 30% of the property outright, requiring £150,000 of its £200,000 cash balance. The remaining borrowing of 70% - £350,000 - would, be facilitated by the use of property.
The brothers were presented with an immediate release of £150,000 of cash from the SIPP. Consideration was needed for CGT, stamp duty and legal expenses on the total property market value.
The borrowing repayments were set over a five-year term, with a commercial rate of interest attached. This meant the brothers would be provided with a return of capital, in cash, meeting their income needs in full over the period. The only tax consideration was income tax on the interest. This was not a payment of pension benefits, and did not represent a crystallisation of pension benefits meaning the brothers’ entitlement to tax-free cash continued to grow in line with their share of the fund.
All three properties continued to be tenanted under the ownership of the pension scheme. The combined rent roll totalled circa £80,000. This in turn presented not only scope to meet the outstanding loan arrears in full, but also provided the ability to meet future pension withdrawals without requiring the sale of any properties, and in line with the brothers’ income requirements.
This strategy also presented benefits from a legacy planning perspective as the retained assets within the SIPP (the three properties) no longer formed part of the brothers’ estates for inheritance tax (IHT) purposes, something that had been a concern for them both.
The above example highlights a way in which a sophisticated pension arrangement can work to deliver on client objectives, both personal and business, where creative solutions are considered.
Note that the above is an example and should not be construed as advice; investment decisions should be guided by formal advice, with consideration of individual circumstances.
Matthew Lowe DipPFS, Wealth Management Consultant of Mattioli Woods plc