Gemma Fenton pens her first article for RP - a SSAS case study featuring a property purchase
Mark Johnson (57) and Jeremy Oliver (39) are directors of a fairly small technology company, JO Tech Limited, which they have run together since 2009. They each take a salary of £45,000 pa plus dividends.
Mark and Jeremy own 50% of the shares each and are both married. Mark has one grown-up child and Jeremy has three young children. Their spouses both work part-time but for other businesses.
JO Tech Limited has been very successful and has built up £850,000 in the business accounts.
Currently, they have 15 additional staff all of whom have worked for the company for several years. These include Sarah, the sales director and David, the technical director. Mark and Jeremy know that they are vital to the running of the business.
Mark and Jeremy run the business from offices that are owned by them personally. The factory was bought by them in 2010 for £380,000 and is now worth £650,000.
Personal planning
During the years of owning their business, they have given all their time to the day to day running of the business and spent little time focusing on their own financial planning. They have each managed to build up around £150,000 in their pensions; however, have not contributed for the last three tax years.
Mark and Jeremy want to utilise some of the cash that has been built up in the business, and potentially use their pensions to purchase the property from themselves personally. Having made this decision they decide to seek financial advice as they know this can be a complex area and arrange to meet Simon Jacobs, an adviser that has been recommended to them by a number of local business contacts.
Following a number of meetings with Simon, the financial adviser, they decide that the company should establish a small self-administered scheme (SSAS) and they start by transferring their existing pensions into the SSAS. JO Tech Limited then make contributions for each of them of £160,000, further boosting the fund to a total of £620,000.
They then look at the potential property purchase. Before they met with their financial adviser, Mark and Jeremy weren’t sure if they could buy the property from themselves or how to make up the shortfall in the funds.
Simon explained that the good news was that following some initial due diligence checks, the SSAS can purchase the property from them.
To ensure the purchase will be considered an arms-length transaction the SSAS will require a valuation of the property, completed by an independent RICS valuer, confirming the market value and rental value. The solicitor will also put in place a lease between the SSAS (as landlord) and JO Tech Limited (the tenant).
Mark and Jeremy agree the terms of the lease, having discussed it they decide on a period of five years, with no break clauses and fully insuring and repairing conditions.
They then turn their attention to the shortfall in funds.
Simon had explained that the SSAS can borrow up to 50% of its total net assets, but they are not keen on approaching their business bank account manager. Instead, it is suggested that they look to their business to put in place a five-year lending plan (mortgage) based on commercial terms between the SSAS and JO Tech Limited.
The loan agreement is drawn up by the solicitors for a loan of £100,000, to ensure all fees are covered as well as the shortfall for the purchase. The mortgage payments are more than covered from the rental income and there is also a contingency balance left in the SSAS bank account, for the time being.
Mark and Jeremy are pleased with setting up a SSAS and commit to reviewing their planning requirements each year, hoping to make further use of the company SSAS.
They commit to future pension contributions and further investments, which they now review with their adviser on an annual basis.
Gemma Fenton is business development manager at Talbot and Muir
