PENSIONS - 11.01.2010

Property pension premiums

Tax utopia

If you were offered an investment on which you could claim a tax deduction for the cost, all the income it generated was tax-free, and when sold at a gain there was no tax to pay, you would probably jump at the chance. Well, if your company owns the building it trades from, you might be in luck.

The plan

The idea is simple enough: your company can transfer a share, or maybe all, of the property it occupies into your pension fund. The value of the transfer will be treated as a pension contribution on your behalf. Once transferred, your company will pay rent to your pension fund for use of the building. The rent will be deductible from the company’s Corporation Tax (CT) bill. And better still, your pension fund won’t have to pay a penny in tax on the rent because it has tax-exempt status. But it’s not all one-way traffic.

Costly exit strategy

If the property is worth more than was paid for it, the increase is treated as a taxable gain when the company transfers into your pension fund.

Example - part 1. Simon is the only director/shareholder of SD Ltd. The company operates its business from offices which it bought for £115,000 eight years ago. They’re now worth £165,000. SD transfers the building into Simon’s pension fund and, as a result, the £50,000 increase in value becomes chargeable to CT. Even though SD is allowed to reduce the gain to take account of inflation since it bought the property (this is called “indexation”), it will still have a CT bill. Assuming the company pays tax at the lower rate of 21%, the CT on the gain will be around £8,000. At this point you may be thinking twice about the idea, but there’s some more good news.

Extra tax deduction saves the day

As the transfer of the property is treated as a pension contribution, the company can claim a CT deduction for it.

Example - part 2. The transfer of the property by SD is treated as a pension contribution for Simon and is therefore tax deductible. So, SD can claim relief on the whole £165,000 giving it a reduction in its CT bill of £34,650 (£165,000 x 21%). Thus the spectre of £8,000 CT payable has been turned into a £26,650 (£34,650-£8,000) tax windfall for SD. Not only that but Simon’s pension fund now owns a property earning tax-free rent. And just to top it off, its tax-exempt status means that any gain it makes when it sells the property is entirely tax-free.

So much for the theory

While all the figures here stack up to a very tax efficient way to extract income and capital from your company, it’s complex and not a DIY process.

Tip. Use apension fund manager that specialises in transferring commercial property into a personal pension fund (see The next step). There are significant costs, but as an overall tax-saving scheme they don’t come much better.

For a list of specialist pension providers, visit http://tax.indicator.co.uk (TX 10.07.03).