Do you own a clinic? are are you thinking about buying one?

Consider the following - You are interested in purchasing a business property, for which you need some funding. You are aware that the interest accrued can become a deductible expense. However, do the following additional advantages appeal to you?:

If you hold the property outside of your business then the rent paid could be tax deductible in your own accounts and tax free when received. This could mean that when the rental payments equate to the loan repayments you effectively get tax relief on the capital element as well!

Secondly, any increase in value (which incidentally, has averaged 11.2% p.a over the last 10 years *) could also be tax-free.

Then you need to think 'Pensions' and in particular SIPP's.

A Self-Invested Personal Pension (SIPP) is a pension scheme into which you are allowed to invest into commercial property. A minimum of 25% of the purchase price must be in the SIPP to use as equity. The remaining 75% can be borrowed by the pension fund trustees at normal commercial rates in order for the clinic property to be purchased by the scheme. As with an ordinary personal pension:

Tax relief is available on contributions (based upon maximum contributions, higher rate payers, under 35 years, could receive £4,066 relief at source and up to £3,326 off their tax bill, whilst over 60's save £9,292 relief at source and up to £7,603 off their tax bill).
Simply for every £6,000 that is contributed the Inland Revenue will boost this by £4,000 for higher rate taxpayers.
Employers contributions made to the scheme are a deductible expense

The limitation

As with any pension scheme, the benefits cannot be taken until at least 50 years old, via the normal annuity or Income Drawdown method. This means that although the property can be sold by the scheme, the proceeds can ultimately only be used to purchase pensionable income.

Requirements

The 25% equity can either be transferred to the SIPP from other personal pension plans (PPP's), or made as a normal contribution, by 5th April 2006.

Please be aware that a contribution limit exists and is based upon a percentage of your net relevant earnings (NRE), which includes only employed and self-employed income NOT dividend income.

ACT NOW - legislation changes 5th April 2006.

From 6th April, borrowing limits with the SIPP are reduced and the calculation of NRE alters. On a practical level, you will need to have more funds in the SIPP to commence the commercial property transaction.

Eg.

Mr Bones (age 40) has an existing personal pension and wishes to purchase the premises from which he currently operates on a leasehold basis. The property has a market value of £350,000. Mr Bones's pension pot currently stands at £63,000.

Due to his age, Mr Bones may contribute up to 20% of his NRE's to a pension. As his 'deposit pot' needs to be 25% x £350,000 = £75,000, he needs to contribute an additional £12,000. As long as his total employed and self-employed income is deemed to be £60,000 (x 20% = £12,000) he may do this, funds permitting. He would get a tax reduction in cash terms of £2,160.

Processed after 6th April, Mr Bones would require £233,333 in his 'pot' due to borrowing alterations within SIPP's. Therefore he would have to contribute the maximum allowed of 100% of NRE's (after 6th April 2006) for 3 tax years before the purchase could proceed.

However, some compensatory opportunities become accessible from 6th April, including the ability to invest in residential and holiday homes. This will resolve the current difficulties of properties also containing residential premises.

Please contact Lucien Trathen at finance4chiropractors for a consultation and full details of the package available via our investment services and banking section.

This article is intended to provide you with information only and should not be taken to constitute advice. If you are interested in purchasing commercial practise premises we would strongly recommend that you seek independent legal advice.

* Source IPD annual return over 10 years to December 2004

Please remember that the value of investments and the income from them can go down as well as up and you may not get back the full amount invested.

Past performance is not necessarily a guide to the future and cannot guarantee the future returns of a fund.

finance4chiropractors are a division of Kelsall Steele Limited, who are a firm of Independent Financial Advisers and are authorised and regulated by the Financial Services Authority