The Challenges
Nadia’s son Omar runs a small art gallery. Over the past five years he’s faced the possibility of having to relocate twice due to the owners of the premises deciding to sell up. He hopes to be able to purchase his own premises in the future, but hasn’t the funds to do so at the moment, having just bought his first home and having only limited pension savings.
The neighbouring property, which is actually a better fit for Omar’s business, has just been put on the market for £300,000. Omar may consider renting the new property from its new owner, but he would still face the possibility of having to move if those owners decided to sell again.
Nadia would like to help provide some stability for her son and his business. She has a pension worth £400,000 which is mostly invested in equities, but limited savings outside of the pension. Nadia has heard about property investments using a SIPP, but is unsure if it will be possible when her son will be the tenant. She and Omar approach Timothy, Nadia’s financial adviser, for help.
The Actions
Timothy confirms that Nadia can purchase the property using her pension and lease it to Omar’s business, as the rules allow for transactions between ‘connected parties’. However, he explains that there will be more conditions than if Nadia was purchasing the property herself.
Timothy explains that Nadia’s SIPP provider would be the legal owner of the property, and it must demonstrate to HMRC that it acts as any other commercial landlord would on the open market. As such, with connected party transactions, the provider must make sure that everything happens at market value.
This isn’t a concern for Nadia when purchasing the premises to begin with, as she has no connection to the current owner. However, it will be important when drawing up the new lease for Omar’s company. A valuer will need to confirm a market rate of rent for the premises; Nadia and Omar can’t simply agree an amount between them.
Timothy also tells Nadia that if Omar fails to pay rent, her new SIPP provider would have to pursue Omar for the money; in order to ensure HMRC’s rules are satisfied it wouldn’t be able to allow any concessions without valuation advice. Nadia and Omar both accept this condition.
Timothy also wants to talk to Omar about his pension arrangements. Omar knows that he should be saving more, and Timothy confirms this. He also explains that if Omar builds his own pension, he could purchase part of the property from Nadia in the future, and potentially purchase all of it further down the line.
The Results
Timothy arranges for Nadia to transfer her pension to a Curtis Banks Your Future SIPP, and she uses part of her fund to purchase the property. While Curtis Banks has a panel of professionals for customers to choose from, Nadia and Timothy are also able to use a solicitor and valuer of their choosing to complete the purchase. The valuer confirms the market rate of rent for Omar’s company to pay.
Nadia is also reassured by having a succession plan for the property: Omar will increase his pension contributions immediately and plans to purchase at least part of the property from Nadia before she retires, leaving more cash available should she wish to withdraw it.