Planning for succession in a family business is an important matter. Whilst there are many strategies, one that often falls under the radar is using your pension scheme as part of the overall plan. In particular, a Small Self-Administered Pension Scheme (SSAS) could be most useful.
Our clients are an established, family-owned retail builders merchants which have traded from the same large site for 30 years and been in business for over 70 years.
Two generations run the business, the father and his two sons (who are step brothers). They don’t own the land and buildings, nor does the company, but their pension fund does. The site originally cost £150K and has a book value of £2.5m… That was until developers started forming an orderly queue. Latest offers have reached over £15m to include a lease-back at peppercorn rental to allow the business to continue.
The pension fund is a SSAS which the family controls along with Hurley Trustee Services acting as their professional Trustee. The SSAS leases the property to the business at a full market rental (tax deductible in the hands of the company) and the income is tax-free in the pension fund and is used to pay the father’s monthly pension. Pension schemes are exempt from Capital Gains Tax and therefore the huge potential gain will be tax-free. The entire pension fund is available for the family without any Lifetime Allowance issues as all the members have Enhanced Protection.
They are faced with choices about the succession of the business and their SSAS can help them and many other family owned businesses. Here’s how.
If family Directors have a collection of SIPPs jointly owning say the commercial property from which the business trades, where one member wants to transfer-out, retire or dies there can be a number of complications.
The other family members might have to buy the exiting member’s share of the asset (which could involve multiple mortgages). Alternatively if the property has to be sold (to pay benefits) this might mean the business having to relocate, lease back the property or as a worse case, cease trading. It may even prove impossible to find a buyer in the right timescale and at the right price – it can all get very messy and costly.
SIPPs are regulated pensions and property transactions will need to be approved in accordance with the provider’s rules. These may be onerous and in practice such transactions can often take a considerable time. With a SSAS it is the trustees (i.e. the family members) who agree the process with their professional advisers. It is possible to transfer multiple SIPPs into one SSAS, transferring all the investments ‘in specie’ at that time.
The opportunity for a SSAS to play an important part in strategies designed to preserve family prosperity has never been better.