Technical: Buying a business with help from self-invested pensions (with case study)
31 March 2020
Paraplanners and advisers may sometimes find themselves handling an enquiry from a client who wishes to buy a business. Key questions around the subject are likely to include how the transaction is to be structured and funded and, often, the client does not have enough business / personal wealth to conclude the transaction in their own right. Clients might turn to their advisers for guidance on how else the transaction might be structured. Stephen McPhillips, Technical Sales Director, Dentons Pension Management discusses the available options.
The first port of call may be financing the deal with borrowed funds. Various sources of this finance might be available, including borrowing from the client’s own business / personal bankers.
Of course, if the borrower is a limited company, a Small Self Administered Scheme (SSAS) could be the source of the funds provided the company in question is a ‘sponsoring employer’ of the SSAS. The loan must meet strict criteria laid down by HMRC. One of the most challenging of these criteria is that the loan must be secured by a First Legal Charge over a suitable asset or assets of at least equivalent value to cover the amount of capital and interest due over the term of the loan. It is this requirement alone that often rules-out a SSAS as a source of loan finance to a connected business. However, it should also be noted that a SSAS can lend to companies that are not connected with the SSAS members, without the same HMRC constraints that apply to loans to sponsoring employers.
Self invested personal pensions (SIPPs) cannot lend funds to connected parties – either directly or indirectly. As a result, SIPPs cannot be viewed as a source of loan finance to connected parties.
Equity participation (unquoted shares)
Where the business being acquired is a limited company, the underlying transaction might be purchase of some / all of the share capital in that business from the current shareholders. Given that SIPP and SSAS are permitted to acquire unquoted shares, it would be natural to view these as a potential source of funds to assist with the business purchase.
There are, however, significant due diligence considerations to be borne in mind with SIPP / SSAS unquoted share ownership and the due diligence work should be structured to ensure that ownership of those shares does not cause tax penalties. For example, extreme care should be taken to ensure that the SIPP / SSAS is not in a position to exercise any degree of direct or indirect control over the limited company and that no SIPP or SSAS member or anyone connected with a member, is a controlling director of the company. A surprisingly small SIPP / SSAS shareholding could create a casting vote situation with four or fewer other shareholders.
A SSAS is also limited to using no more than 4.99% of its net market value to acquire shares in a company that is a sponsoring employer of the SSAS. This restriction does not apply to SIPPs.
It may surprise readers to learn that commercial property purchase by SIPP / SSAS is often the easiest way for self-invested pensions to participate in a business acquisition. Bricks and mortar can be viewed as a fairly complex area, and undoubtedly it can be in some cases, but in comparison to the other funding options outlined above, it can actually be the most straightforward and achievable route to go down. It also helps that the rules for property purchase are identical for SIPP and suitably structured SSAS, so either vehicle might be suitable depending on the client’s circumstances.
In order for this route to be feasible, the business being acquired must, of course, own commercial property and it must be available for purchase as part of the overall deal to buy the business – as is often the case.
In terms of the nuts and bolts of the transaction, it is likely to be necessary to isolate the value of the bricks and mortar element of the business from all other elements such as plant and machinery, stock, debtors’ book, goodwill and so on. Typically, this will involve instructing a Royal Institution of Chartered Surveyors (RICS) Registered Valuer to value the bricks and mortar specifically. Any “tangible moveable property” (such as desks, chairs, computer equipment, etc.) should be excluded from the Valuation and from the SIPP / SSAS purchase because these items would be “taxable” property if owned by the SIPP / SSAS. If the bricks and mortar includes a residential element which does not comply with HMRC’s narrow rules around these being held in SIPP / SSAS, then it too, should be excluded from the Valuation and from the purchase by SIPP / SSAS. Ultimately, the client can use business and / or personal wealth to acquire the business excluding the bricks and mortar, with the SIPP / SSAS separately acquiring the commercial property.
With careful attention to the detail, SIPP / SSAS can assist a client to acquire a business in a number of ways and the pension arrangement might be key to the overall funding structure.
Vet practice for sale – purchase price £750,000 (including commercial property, fixtures and fittings, goodwill, etc.).
Client has personal / business funds available of £500,000
RICS Registered Valuer is instructed to value the commercial property owned by the practice (no residential element). Valued at £250,000.
Client has £180,000 in an existing personal pension which is transferred in cash form into bespoke SIPP.
(Client does not wish to make any Employer / Member contributions because business / personal cash is needed for the business purchase).
SIPP borrows £90,000 (maximum 50% of its net asset value) from a commercial lender.
SIPP acquires commercial property for £250,000, leaving £20,000 to cover all associated costs such as Stamp Duty Land Tax (SDLT), legal and valuation fees and so on. Property is not opted to tax (so, no VAT payable on the purchase price).
Client uses personal / business funds of £500,000 to acquire the other elements of the business and the business acquisition is completed.
Commercial property is leased to client’s business with a commercial level of rent (as confirmed by the Registered Valuer) being paid into the SIPP.