Case studies

Stephen and Jo are 42 and 39 respectively. They are the directors of their own limited company, married and have two children.

Stephen and Jo own their own main residence and the commercial property their company trades from, with a £100,000 mortgage on each. They have £25,000 of cash savings and £160,000 of personal pensions between them.

Stephen and Jo wanted to become mortgage-free as soon as possible, but they also wanted to spend around £100,000 on a major home extension, improvements and redecoration.

The business was doing well and had around £300,000 of cash reserves. Stephen and Jo knew they could draw some of this out to pay for the works but were worried about dividend tax.

They were also concerned that they didn’t have enough life cover or critical illness cover. They had policies that covered their mortgages, but they paid for these personally and wanted a greater amount to act as family protection.

We completed a budget planner and cashflow model, establishing the level of income that Stephen and Jo needed to achieve their objectives. We discussed their attitude to investment risk, their experience with investing and their capacity for loss, in order to ensure any recommendations were suitable.

We concluded that they should take the following actions:

• Make a company pension contribution of £80,000 for each of them.
• Transfer their Personal Pensions to a new Small Self-Administered Scheme (SSAS). The new SSAS, now worth around £320,000, could then purchase the commercial property from Stephen and Jo.
• Cancel their existing Life and Critical Illness policies and replace them with Relevant Life policies. This would give them both life and critical illness cover equal to two times net profit.

After they used the proceeds from the sale of their commercial property to clear the mortgages and pay for the work on their house, Stephen and Jo are now mortgage-free and enjoying life in their bigger, newly-renovated family home.

As the commercial property is now in their pension fund, they have to pay full rent to their pension fund of £24,000 per annum. However, with it being a pension fund, there is no income tax to be paid on the rent and no capital gains tax if they ever sell it. It’s also protected should they or the business ever get into financial difficulty.

The rent and any future pension contributions will be invested in a suitable risk managed investment portfolio, held within the SSAS.

Their £160,000 pension contribution reduced their corporation tax liability, saving the business £36,000 in tax.

Cancelling their protection policies saved Stephen and Jo £302 per month in premiums. The new plans cost more, however they are paid for by the business. They are an allowable business expense, so this will save them some more corporation tax. The benefits are still tax-free, so do not increase Stephen and Jo’s income tax liability.