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When SIPPs can bite!

Small to medium businesses owners who need premises are often advised to use their pension money to buy the premises. Then their business pays rent on commercial terms for the premises to their pension scheme, which in turn pays off the commercial mortgage. Given average luck, the business owner should live happily ever after, as at retirement, they can sell the business as a going concern, with or without the premises, let the premises to the new owners and spend the income or just sell up and use the cash to finance their retirement.

As the premises are held within a pension contract, (a Self Invested Pension Plan), the rent paid in is a business expense, any capital gain is tax free and the proceeds are taxable on normal pension rules, with the first 25% tax free and taking an income treated as earned income. Under most circumstances this is a good deal for the business owner, but there are some traps for the unwary, especially those who do not think through the consequences of the legal agreements signed up.

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All is not sweetness and light when things go wrong, it can get really nasty, as the business owner with a property in a SIPP wears two hats, both as a tenant and as a trustee for the landlord. If the tenant is in rent arrears, the same business owner can find themselves having to issue proceedings for non-payment of rent with a view to eviction, under the less than benign, steely eye of Her Majesty’s Customs & Excise.

If a rent debt becomes reportable, then HMRC will see this as an unauthorised pension payment and apply an excess charge to both the pension owner and the trustees, (40% for the former and 15% to the latter), which as they are substantively the same person, this is really going to hurt.

To further twist the knife in the wound, a tenancy in arrears will also prevent the payment of any benefit payment requests, (pension payments!), property transactions or transfers out until the arrears are cleared. This can be a complete impasse, until the tenant has regularised the rent or forfeited the lease. The pension trustees are bound in law to chase the arrears to the final, commercial conclusion, be it surrendering the deposit, calling in any guarantee, eviction, forfeiture and the pursuit of the debt through the County or High Court. This may not end well; corporate liquidation or personal bankruptcy is not impossible.

All business owners with business premises in SIPP arrangements need to remember there are two contractual arrangements here; the first as a tenant, on a commercial lease with no right to be “let off”. The second legal arrangement is as a trustee for the landlord; you must escalate all tenancy breaches as appropriate, so non-payment of rent needs to go all the way to collection. Even permissions for property alterations need to handled formally, with permission requested and formally granted, as it is a connected party relationship and subject to considerable scrutiny.

This formality is the price that has to be paid for a considerable tax and business advantage. As they say in the Army, “if you cannot take a joke, you shouldn’t have joined!”

Contact us with queries

If anyone is looking for general advice, then please write in to the blog and we would be happy to help with anonymous advice posted here. Alternatively, please call us on 0116 253 5600 and ask to speak to an IFA, (Independent Financial Adviser), for a no-obligation discussion.


Categorized: Business Advice , Pensions , Retirement Planning , Tax Planning
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