Property in SIPP/SSAS and Death Benefit Trap
Contributed by MW Pensions
26 September, 2012
Contributed by MW Pensions.[www.mwpensions.co.uk]
This Newsletter is meant for professional Advisers, members of the public should not rely upon it
SIPP & SSAS were often set up by businesses to purchase and own their commercial premises i.e. offices, factory etc.
The benefit of having a property in a pension are:
- a tax relief on contributions aided the purchase,
- rents were paid to the pension fund free of tax
- rents are tax deductable as a business expense
- should the properties be sold the sale proceeds were not subject to capital gains tax
Pension Rules on the Death of a Member
If a member dies and they have undrawn benefits (uncrystallised), the members fund can pass on, free of inheritance tax, whatever assets are held.
However, if the member dies and is in drawdown (has taken their Pension Commencement Lump Sum or received pension income) or is aged 75 their fund suffers a tax charge of 55%
In simple terms, a fund of £800,000, the charge of 55% is levied against the pension fund, in this case a charge of £440,000.
If the fund is an illiquid asset such as property how does the pension charge get paid?
Perhaps more importantly, if the property has to be sold who is to be the purchaser, family members, the business or other pension funds?
If the individual/business cannot buy the property where will the business trade from?
Many of these businesses are family owned and the property is the major asset typically generating income/rent in the region of 10%. Why would you want to sell an asset generating such good returns?
The failure to plan could
- Result in the loss of the property
- Forced sale resulting in a lower value for the property
- Loss of the business premises
- Loss of profits.
- A charge on the pension fund with no liquid assets
- Penalty payments if the tax charge is not paid
Planning is the Key
Do you have an issue or a potential issue?
If so, or you would just like to discuss your options please feel free to get in touch with us.
In the meantime please consider the attached Case Studies, which are actual cases, but heavily disguised
1) Family owned businesses trading from a unit on an industrial estate. The industrial estate and units are held in the parents SSAS.
SSAS assets £1.2m (property £900k) assets split 80% to David 20% to Shirley
Pension scheme receives annual rents of £140k they are both in combined drawdown of £90k
Shirley and David are about 60, 3 children in late 20s. They want the property and income to be passed on
If they waited until both Shirley and David had died the SSAS would have to pay the pension charge which would be £660,000 i.e 55% of £1,200,000 and there would also be inheritance tax on the family estate. The SIPP would have insufficient other assets so could not afford to pay the pension charge and the family could not afford both that and the inheritance tax bill at the same time.
The family decided to buy the property from the pension fund using personal money and bank finance.
2) SIPP has assets of £599k including £368k property. Rental income £36k pa
Ken, aged 74, is married to Deirdre, aged 70, and they have two children Peter 40 and Tracy 37.
Ken draws state pension £10k pa and has been drawing c. £80k pa from SIPP
On fund review and because of reduced GAD rates, the maximum withdrawal was reduced to £43k
Upon the death of Ken and Deirdre a 55% tax charge would apply i.e. £329,450 based on fund of £599,000 almost equivalent to the property value of £368,000.
Ken could consider buying property from his SIPP or the property could be purchased by the children, who are currently running the business from the property owned by the SIPP.
3) A SSAS with 3 members - Terry & June and son Peter The scheme has assets totalling £156,000 of which the commercial property accounts for £145,000 of the value and the balance £11,000 in cash.
Terry is 65, Peter the son aged 40 and June aged 65 who has recently died
The scheme assets are split as follows:
Terry 75.69% = £118,176
June 20.40% = £31,824
Peter 3.9% = £6,100
There is insufficient liquidity to pay the death benefits of £31,824 for June as only £11,000 is available in liquid form.
Terry is unable to take any tax free cash because there is no liquidity in the scheme.
The business has suffered a downturn and no rental income has paid to the SSAS which restricts the ability to take income as a pension.
The solution was to release the property from the scheme and enable benefits to be paid.
4) Tom & Jerry is a Limited Company with a SSAS that owns the building from which the business operates. The major asset of the scheme was the commercial property valued at £484,000 and providing rental income of £52,000.
Both Tom aged 59 & Jerry aged 64 want to consider closing the business and retiring and drawing the benefits
If the business ceased to trade upon retirement they would lose the rental income, thereby reducing the level of pension they could draw.
One possibility was whether the property could be sold or they could lease the property to alternative tenant thus securing their ability to draw benefits.
The clients decided instead to maintain and grow the business by employing a business partner, giving them a shareholding in the business to secure its success, which in turn secured the rental income and their ability to draw their pension income.
MW Pensions Limited, Oaklands Business Park,
Hooton Road, Hooton, Cheshire, CH64 4AF
Tel: 051 328 1777 Fax: 0151 218 0707
e.mail: email@example.com www.mwpensions.co.uk
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