If you and your fellow directors are looking for a home for your pension savings, look no further than your firm’s business premises. When can you turn a commercial building into a tax-efficient investment?
Employer pension contributions
As a tax-efficient method of extracting profit from your company, employer pension contributions tick most of the boxes – as long as you’re prepared to wait until you’re 55 to get your hands on the loot. No tax or NI has to be accounted for on the money your company pays into your registered pension fund and the investments grow in a tax-free environment.
Further tax breaks
Employer contributions are not only a tax-free benefit in kind for you, but unlike the payment of dividends by your company, they are tax deducible from its profits. The advantages don’t end there. When you reach 55 you can take 25% of your pension fund tax free. This all sounds very good, but you might be able to do better.
Tip. A further tax-efficient twist to the arrangement might be possible if your business owns the freehold or long lease on its premises.
Bricks and mortar
You and your fellow directors can use the employer pension contributions to buy all or part of your company’s trading premises. The pension fund can then lease the building back to your company at a market rate rent. The rent counts as a tax-deductible expense for the company, but your pension fund is exempt from paying tax on the rent it receives. Transferring the property from ownership by your company to your pension fund creates another tax-free way to extract income from the business.
Trap. The arrangement is not entirely tax free. If at the time the property is transferred to your pension it’s worth more than your company paid for it, your company might have to pay corporation tax (CT) on the difference.
Example. Your company bought the freehold of its trading premises in January 2001 for £150,000 and in April 2020 sells it to your pension fund for £270,000. Therefore, the gain on which CT is payable is £120,000. A deduction of £93,750 is allowed to account for the effects of inflation up to December 2017 (which is when it was frozen), this is known as indexation. After indexation there’s a taxable gain of just £26,250 on which the CT payable is £4,988.
The big picture
Selling a property and triggering a CT bill might not appeal to you, but in practice after taking account of the extra tax relief your company receives for the pension contributions it makes to pay for the property purchase, there’ll be hardly any tax to pay. In fact it’s likely HMRC will owe it money.
Example. Assuming the facts are the same as in the first example, to fund the purchase of the property your company makes employer contributions of £70,000 each for you and your three fellow directors – £280,000 in all. This provides enough to cover the property purchase price, plus stamp duty land tax and other expenses, e.g. valuation and legal costs. Your company will receive CT relief of £53,200 (£280,000 x 19%). This more than covers the £4,988 tax payable on the sale of the building and the difference will reduce the company’s normal CT bill.
Note. To prevent a personal tax charge relating to the company making a pension contribution for you and the other directors you must each have sufficient pension “annual allowance” to cover the amount the company pays into your pension fund. Normally, the annual allowance is £40,000 per year plus any unused allowance from the previous three years.
Get advice. If you think that this scheme might work for you, the first step is to speak to your financial advisor or pension plan provider.