All of the examples are based on real cases, although some of the detail may have been changed for reasons of privacy or simplicity.
A businessman owns a commercial property that houses his business, valued at £250,000 with a £100,000 loan secured against it. He has £200,000 in his pension funds. He needs some cash for his business. In the past he could have leveraged on his property and borrowed against this to raise funds. Banks are currently unwilling to help. Instead he sells his property to his pension fund for £250,000 by investing a further £50,000 into the pension (on which he gets tax relief, saving around £13,000 in tax) and then using his fund to buy the property. The loan of £100,000 is cleared: he keeps the additional £150,000 proceeds. There are costs, including stamp duty and possibly Capital Gains Tax, although it did not apply in this case.
A company of many years standing has 6 shareholders, one of whom, the original founder, holds 35%. He wishes to sell his shares as he is retiring. The shares are unlisted. The valuation of his shareholding is assessed as £600,000. The other shareholders are given first refusal and wish to instigate a purchase of the founder’s shares. Some of them have the money to instigate the buyout, some do not. Those that have not got sufficient cash do however have monies in pensions and they use these to buy the residual shares that they are entitled to, making the buyout possible.
XYZ Limited, a small recruitment consultancy specialising in the City, wish to expand. In order to do so they decide they need to increase their marketing from the current year’s £50,000 budget to a budget of £200,000. They also wish to construct a brand new web site at a cost of £40,000. The total expenditure on these two items is £240,000: but they don’t have the funding to achieve this. Between various parties (including friends) the owners invest some of their pension monies in to a brand new company XYZ No.2 Ltd. Six of them each invest £40,000 of their pension funds into the new company. This gives the new company £240,000 in cash (it has no other assets and no other liabilities), which means it is worth £240,000: making this an exact valuation. XYZ no. 2 ltd under contract to XYZ Ltd now builds the new web site and spends (over the next 12 months) £200,000 on marketing. The deal with XYZ (no 1) is that for every successful placement XYZ no. 2 will receive 20% until the £240,000 has been repaid and doubled. This is a fantastic deal for all parties: if successful the pension fund for each person is doubled. XYZ Ltd gets additional marketing and a brand new web site and is able to expand and the pressure for funding and on cash flow is removed.
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