A financial planning opportunity for a family business

Business owners Bill and Ben have successfully built up their garden centre business over the last ten years following their high profile careers in entertainment. Their success has been supported by their families and they have now reached the point where their business needs to expand into bigger premises. 

They are worried that the financial pressures of taking on a big commercial mortgage will put a lot of strain on the business, but they both know that their ideas are good and want to pursue their expansion plans.

Both Bill and Ben have some savings and have paid themselves relatively high salaries and they have pension arrangements that they built up in their previous careers.

Bill’s parents, Jemima and Dougal, and Ben’s brother, Ted, all have pension funds. Jemima and Dougal, who are not yet retired, have good final salary pensions from their years working in broadcasting, which they know will provide them with a comfortable retirement. Dougal also has a personal pension from which he doesn’t need to take benefits now, but he wishes to be more involved in running this investment.

Ted, who is married to Florence, runs his own landscaping business which is doing very nicely, as he works mainly for some of Bill and Ben’s old celebrity friends – weeding is a particular passion of his. He has had a Self Invested Personal Pension (SIPP) for some years now. They all want to continue supporting Bill and Ben’s growing business, so the whole family decides that they should seek some financial advice to see what could be done.

The result of a number of discussions with their adviser provides them with a solution that feels like they are all going into business together – they establish a Family Self Invested Personal Pension.

This arrangement has the following benefits –

  • Potentially lower costs than several bespoke SIPPs
  • Increased borrowing potential by involving the whole family
  • Each member can ensure that their own attitude to risk can be taken account of, as investments can be made individually or as groups, pooling their investments in common funds or assets.

Bill, Ben, Dougal and Ted all transfer their money purchase pension funds, which are £125,000, £125,000, £100,000 and £250,000 respectively, into the Family SIPP - a total of £600,000. Bill and Ben are also advised to each pay in the maximum allowable contribution to their plans, currently £50,000, and as they are higher rate taxpayers, this will only initially cost them £40,000 each and they can claim a further £10,000 tax relief through their tax returns.
The Family SIPP now has total funds of £700,000 against which they can borrow up to half of the value of the scheme (£350,000), meaning that total available funds are £1,050,000.

The whole family can pool their funds to purchase the commercial property. However, Bill and Ben strike a really good deal on the property they need and the required investment of £625,000 is split between Bill and Ben, £125,000 each, Ted, £150,000, Dougal, £50,000 and borrowings of £175,000. This forms one Common Investment Fund.

Bill and Ben have their remaining pension savings of £50,000 each, in a second Common Investment Fund which is invested in a managed portfolio recommended by their adviser. Dougal has invested his remaining £50,000 in a portfolio of equities and bonds that he wants to manage himself, while Ted has followed the advice he has received and has invested his £100,000 with a selection of investment funds designed to provide long term growth.
Whilst we’ve protected the identities of those involved here with a mixed up range of children’s TV characters, the fact remains that many readers will have forgotten the flexibility of pension arrangements and may never have thought of using them to make a family business a truly family-wide enterprise.

If you’d like to discuss this concept, or any other aspect of financial planning, please contact us.

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