Financing premises for a new optical practice

The scenario

Kate, AOP member

“I’ve been in practice for a few years and I’m now looking to buy my own premises. There isn’t an existing practice in the area for me to take over, so I’ll be looking to buy a premises and start a practice from scratch. Could you advise me on my options in terms of financing this purchase?” 

The advice

When you set out to open your own optometry practice, one consideration is where and how you will do so. The high cost of rent, especially on UK High Streets, can make buying your own premises an intelligent business move. Owning your own premises gives you greater control over running your own practice, and you will have added security in that the landlord can’t ask you to vacate the premises or increase the rent to a level that may become unaffordable.

Buying commercial property

Buying commercial property is different from buying your home. Lenders tend to take a more individual approach to how much they will lend to you, based not only on what the building is worth, but also on your business plan and the likely profitability of your business.

There are options on how you buy a commercial premises, including whether you buy it in your name, or through your pension.

Buy in your own name

The advantage of buying premises in your own name is that you don’t have to charge yourself rent. Commercial lenders will want to see a commitment from you, and unlike residential mortgages this will vary depending on your circumstances and the risk the lender sees. Commercial lenders will look for a deposit from you, of anywhere between 15% and 40% of the value of the property, which means you need to have saved the capital ahead of the planned purchase.

You can approach your own bank, but the more advisable route is to use a commercial lending broker who understands the market and optometry, and can help you package your application to the most appropriate lender.

“Packaging your application” means giving all the information to the lender in a way they can understand, providing them with as much information as possible, including the proposed property, your track record, your personal financial position, and your business plan.

The reasoning behind this is that commercial lenders price their lending on the perceived risk to them. Therefore, the more you can tell them how good your plan is and why it is going to work, the better the interest rate you will be charged is likely to be.

When it comes to finding finance, Lloyd & Whyte has teamed up with independent finance specialists Rangewell, who have access to thousands of different finance products and over 300 business finance lenders. They are experts in finding the loans for optometrists, and offer fee-free expert advice that can put you on track to finding a commercial loan that suits you.

Buying via your pension

An option that is sometimes overlooked is using your personal pension to help buy your commercial premises. The first point to bear in mind is you need to have the funds in your pension in the first place, so if you are thinking you might like to buy a practice in the future, you may want to start taking action now and paying into your pension more than you might have in the past.

Why would you want to use your pension?

For many people their pension is their largest savings pot, but you can’t access money from it until you are over age 55. You can, however, deploy the money in it as an investment – which a commercial premises could be.

Buying a commercial property through your pension is complex and financial advice is essential. However, the rewards can be significant. Firstly, let’s consider a scenario: your pension is worth £300,000 and you have found the ideal premises for your new practice on sale for £250,000. Your pension could buy the premises for you, and you would have no loan to pay back.

The main thing to bear in mind is that your pension now owns the premises, not you. You have to pay market rent into your pension, so you may be wondering why would you buy through your pension if you still have to pay rent?

Because the rent gets paid into your pension, it is treated by HMRC as growth and not a pension contribution, meaning you can still pay into your pension if you want. Growth (ie the rent) is free of any tax within a pension, therefore your rent has no tax liability on it.

Benefits of buying through your pension

Pensions benefit from all investment growth being tax-free, therefore if you buy a property today for £250,000 and sell it in 20 years’ time for £500,000, you have no tax liability within the pension.

On the same basis, how do you get your pension to a value that will give you the life you want in retirement? Taking the example above. If you rent your premises from your pension, paying £1,000 per month and renting for 20 years, you will pay £240,000 into your pension. In addition, the value of the premises at £500,000 means your pension pot could be worth £740,000 without any additional pension contributions or investing the residual money.

There are numerous benefits and pitfalls to buying a property through a pension, so it’s essential you understand them before you consider and follow through on this option. We have a thorough knowledge of the different ways you can buy a commercial property, whether in your name, through a limited company, or via your pension. If you would like help and advice, please contact us.

Lloyd & Whyte (Financial Services) Ltd are authorised and regulated by the Financial Conduct Authority. Registered in England No. 02092560. Registered Office: Affinity House, Bindon Road, Taunton, Somerset, TA2 6AA. It is important to take professional advice before making any decision relating to your personal finances. Information within this article is based on our current understanding of taxation and can be subject to change in future. It does not provide individual tailored investment advice and is for guidance only. We cannot assume legal liability for any errors or omissions it might contain.