Tag: SSAS

How can you get tax relief on a payment of £500k to a SSAS

Small Self Administered Pensions (SSAS) are common for owner managed businesses.

In general a company can pay up to £40k per year into a SSAS for a employee and if the allowances haven’t been used there is 3 year carry forward option, which could mean up to £120k.

However, where a SSAS has multiple members a company could contribute £500k and get full tax relief. This known as an indirect payment.

Corporation Tax relief on the indirect contribution is available in the year it’s made.  It needs to meet the “wholly and exclusively for the purpose of trade” test. 

If the contribution exceeds £500,000 (up to a maximum of £2 million), the relief must be spread over future years.

Here are the HMRC rules https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm043400

Speak to you SSAS provider for advice and further details

steve@bicknells.net

Why would you put commercial property into a pension scheme?

property investment, 3D rendering, grunge metal stamp

Pensions are highly tax efficient and you can purchase Commercial Property, the main examples of types of property your pension could buy are

  • Industrial units
  • Offices and shops
  • Farmland and forestry
  • Public houses
  • Nursing homes
  • Hotels
  • Marine berth

The things you can’t buy are residential property, holiday property, caravans, beach huts, basically, if you can live in it then it will probably be difficult to put it your pension.

If your business owns its premises or you have mixed property investments where you can title split to separate the commercial from the residential it could well be worthwhile to move the commercial property into a pension scheme (SIPP or SSAS).

The tax benefits are:

  1. When you or your business contribute to your pension scheme the contributions are tax free – for individuals they will will get back tax at 20% and can claim additional tax relief on their self assessment return, for companies they can save 20% corporation tax
  2. When the property is in the pension scheme there isn’t any tax on the rental income or capital gains tax if you sell the property
  3. When you retire you could get 25% of your pension tax free

Other benefits include:

  • Your business could use cash tied up in the premises to invest in trading activities or for other investments
  • Pensions are normally outside of the scope of inheritance tax
  • It will ring fence your property from your other activities

In summary to move your business premises from your business to a SIPP or SSAS pension you would do the following:

  • Find a lender prepared to lend a third of the property value to your pension scheme  (which will be half the value of the fund ie if the property was valued at £300k, your pension could borrow £100k which is 50% of the £200k which will need to be funded by your pension scheme)
  • Have the premises independently valued and rent assessed and appoint solicitors
  • Create a SSAS or SIPP pension (you can include other people in your SSAS or SIPP investments)
  • Transfer into your SSAS or SIPP any funds you have in other pension schemes
  • As you are the business owner and its your pension scheme your business could make a payment into your pension scheme (pension contributions are tax deductible), the maximum for the last 3 years would be £120k (£40k + £40k + £40k) see details of NRE
  • You could make a personal payment to your pension and if you are a higher rate tax payer your will get a tax refund via your self assessment return
  • Then your pension scheme buys the premises from your business and rents it back to the business

steve@bicknells.net

When does a SSAS/SIPP property become residential?

foreman builder and construction worker with blueprint in indoor apartment

This question comes up a lot, the definitive answer is in the HMRC pension manual…

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm125200#IDAYYPQB

Property converted or adapted as residential property

The definition of residential property is a building or structure that is used or suitable for use as a dwelling. It does not therefore apply to property, including land, which is not residential property when the investment-regulated pension scheme acquires it. But the building or structure may become residential property whilst owned by the pension scheme as a result of being subsequently subject to development.

Whilst it is in the course of construction, conversion or adaptation such land and property is not residential property because during that period it is not suitable for use as a dwelling.

Land and buildings being converted are treated as residential property from the point when they become suitable for use as a dwelling.

In any specific case this point should be determined by taking a common sense approach to the facts and circumstances.

Essentially the question to be answered is: would a person normally live in that dwelling?

The point at which this occurs will normally be when the works are substantially completed. In the case of UK property this is likely to be when the certificate of habitation is issued.

A property that is sold before the development or conversion is substantially completed never becomes residential property.

steve@bicknells.net

Is this the end for Pension Inspecie Transfers?

Buildings in the isometric

An inspecie transfer is generally either a transfer of property from a company/individual or pension scheme to a pension scheme.

These are relatively common and usually occur between different Small Self-Administered Schemes (SSASs) and/or Self-Invested Personal Pensions (SIPPs), otherwise known collectively as Investment Regulated Pension Schemes.

Of course an investment regulated pension scheme is under no obligation to accept an in specie transfer. The trustees of a SSAS and the scheme administrator of a SIPP will review the offered asset to make sure that:

  • a proper market valuation has been made
  • it’s suitable for the investment strategy of the scheme

Inspecie transfers generally create tax refunds, just as they would have done had they been a cash contribution which is tax free or tax deductible for companies.

However, according to Citywire 18th Aug 2016, HMRC have decided they don’t like Inspecie Transfers

In recent weeks the tax man has challenged pension providers over the practice of in specie transfers which allow people to put non-cash assets into their retirement plans. Provided strict criteria are met, individuals can claim back tax relief on the transfers just as they would with a normal contribution into a pension.

Neil MacGillivray, chairman of the Association of Member Directed Pension Schemes’ (Amps), told Citywire’s New Model Adviser there was a ‘very strong possibility’ HMRC could ask for tax relief back on contributions stretching back to 2009. This would have significant ‘financial costs’ for individuals and pension providers he said.

I can’t see why HMRC have an issue with these transfers? why does it matter whether the contribution is inspecie or for cash?

steve@bicknells.net

 

What types of property can a SIPP or SSAS Pension invest in?

Buildings in the isometric

Pensions are highly tax efficient and you can purchase Commercial Property, the main examples of types of property your pension could buy are

  • Industrial units
  • Offices and shops
  • Farmland and forestry
  • Public houses
  • Nursing homes
  • Hotels
  • Marine berth

The things you can’t buy are residential property, holiday property, caravans, beach huts, basically, if you can live in it then it will probably be difficult to put it your pension.

Buying a commercial property can be a great investment opportunity, I have been investing in property since 2002 as part of a small pension syndicate of friends and family we are currently invested in an Office Block and 6 Retail Units, we also bought some properties into separate companies and did originally have HMO’s too.

The yield on commercial property is often around 8% to 10% and you can borrow into your pension to help fund the purchase.

Your business can rent a commercial property from you and many owner managed businesses have transferred company owned premises to a SIPP or SSAS.

There have been some very interesting deals done for example

From a music studio in Costa Rica to a yacht berth in the south of France, Sipp (self-invested personal pension) providers report an ever-growing list of exotic assets being bought with pension money to fund investors’ dream business ventures.

Yacht de luxe.

For aviation-mad Tony Fowler, a property developer from West Sussex, the acquisition of a 50pc stake in the Isle of Wight airport through his Sipp means he can fulfil his passion for flight while at the same time investing for his retirement.

Plane and Airport Flat Design Illustration Icons Objects

“A friend and I have paid half each of the total purchase cost of £635,000,” he said. “I was delighted when I found I could use money in my pension to buy the airport. It had been taken over by the receivers and was going to be closed down, but now it is being renovated and improved. We like to think it will bring something to the local economy as well.”

http://www.telegraph.co.uk/finance/personalfinance/pensions/10451405/How-I-bought-an-airport-with-my-pension.html

steve@bicknells.net

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How a Family Pension Scheme will save you Tax

Cartoon family tree

First lets have a recap on why Pensions are a fantastic investment and a great way to save tax.

Inheritance Tax

IHT only applies if the pension company has to pay the value of your scheme to your estate, in which case it becomes like any other asset, but generally the pension pot is held in a discretionary trust, which means it isn’t taxed on death.

You can now nominate anyone not just dependents to be the beneficiary.

Since 6th April 2015 anyone who inherits a pension fund from a person who dies before the age of 75 is entitled to receive it tax free and the you can take the money as a lump sum or income. Once over 75 a special tax of 45% applies (previously 55%), you could reduce this by taking a regular income. The tax rate should drop again in April 2016.

Business Premises

Your pension can own Commercial Property, including your own business premises.

In many cases it is better for business premises to be owned by the business owners pension fund because:

  1. The object of the business is not to own its own property, the objective should be for the business to make profits from trading
  2. The business could use cash tied up in the premises to invest in trading activities
  3. Pensions are a very tax efficient method of ownership – no capital gains, no tax on rental profits
  4. Company Pension Contributions are Tax Deductible and Individual contributions get income tax refunds
  5. You may be able to use 3 year Carry Forward to get funds into your pension scheme

Commercial Investment Property

Your pension scheme can own commercial investment property – shops, offices, industrial units.

It can borrow up to a third of the value of the pension scheme.

There is no capital gains tax and no tax on the rental income.

In Specie Transfers

In Specie transfers can be used to move assets into your pension scheme this could incur capital gains and SDLT (Stamp Duty), but you will benefit from tax relief as if you had paid in cash. Currently that means at tax relief of between 20% and 45%.

Once the assets are in a pension scheme transfers ‘in specie’ between schemes are tax free (no capital gains) and no SDLT.

HMRC say…

In our view the assumption by the transferee fund or by the trustees of the transferee fund, of obligations to provide benefits is not chargeable consideration.

Net Relevant Earnings (NRE)

Many owner managed businesses only pay small salaries and take large dividends, this would normally restrict the level of pension contributions allowed, however, their companies can pay the maximum allowed – currently £40k per year.

Employer v’s Employee Pension Payments (Net Relevant Earnings)

Lend Money to your Pension Scheme

If you have a SSAS or a SIPP Pension you will probably want to invest some of your funds in Commercial Property – Shops, Office, Industrial Units. Pension funds can borrow money and with the current interest rates low and yields as high as 10%, you can increase your return and use less cash by borrowing.

But one thing you may not know is that connected parties can lend to the fund…

Trustees of registered pension schemes may sometimes wish to borrow funds, for example to enable them to purchase an asset. There is no objection to a registered pension scheme borrowing funds for any purpose providing that the scheme administrator/trustees are satisfied that the borrowing will benefit the scheme and that the borrowing is within the rules laid down by the Department for Work and Pensions (DWP).

A registered pension scheme is treated as borrowing or having a liability of an amount, if that amount is to be repaid or met from cash or assets held for the purposes of the pension scheme.

A registered pension scheme may borrow funds from any individual, company or financial institution whether or not they are connected to the scheme, but any borrowing from a connected party which is not made on commercial terms will be subject to a tax charge – see RPSM04104020 .

http://www.hmrc.gov.uk/manuals/rpsmmanual/rpsm07104010.htm

This is useful where you have paid in the maximum allowed pension contributions but you still have cash, so you could lend to your pension to buy a property.

25% Tax Free

When you retire you get 25% of you pension fund tax free.

http://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/pensions-and-tax/tax-and-the-cash-lump-sum

Shares and Loans

SSAS Pensions can lend money to their scheme employer and the scheme employer can borrow from a SSAS subject to passing 5 tests.

Pensions can even buy shares in your business.

Happy 3 generation family in grandparents' backyard

Family Pension Schemes

So now you can see why Pensions are brilliant! lets look at Family Pensions…

Rowanmoor Group PLC summarise the benefits of a Family SIPP as follows

The potential benefits of the Family Pension Trust are:

  • Members, including minors, can pool funds together to benefit from a wider range of investment opportunities
  • Multiple common investment funds allow a variety of bespoke portfolios to be established for some or all members, which widens investment options and can reduce costs
  • Investment decisions do not have to be unanimous
  • Different attitudes to risk can be catered for
  • No minimum fund requirement
  • Increased borrowing potential
  • Succession planning options and death benefits
  • Comprehensive, flexible options to enable retirement income to be phased

Hargreaves Lansdown have a very helpful article on their Family SIPP which includes this example

http://www.hl.co.uk/__data/assets/image/0005/8740085/Pension-family-tree.jpg

Please note – always take professional advice from qualified professionals before setting up a pension, making investment decisions and transferring assets

 

steve@bicknells.net

Contact Us

Can my Pension buy shares in my company?

Entrepreneur startup business model

A pension scheme can buy quoted or unquoted shares in a company based either in the UK or overseas.

An occupational pension scheme can buy shares in one or more of the employers participating in the scheme as long as both the following conditions are met:

  • the total value of the scheme funds invested is less then 20% of the net value of the pension scheme funds
  • the amount invested by the scheme in the shares of any one employer participating in the scheme is less than 5% of net value of the pension scheme funds

Any investment larger than this will be an unauthorised payment and both the scheme employer and scheme administrator will have to pay a tax charge on the amount above the limit.

https://www.gov.uk/pension-trustees-investments-and-tax

So in theory, yes, it is possible, but in reality its likely to fail because:

  1. An independent ‘Arms Length’ valuation will be required, for an unquoted small business or start up this is extremely difficult as establishing a market value for the shares will be difficult and often a start up will have losses in the first few years
  2. The HMRC’s rules which govern all registered pension schemes (in particular the sections covering both taxable property and tangible moveable property) dictate that the combined shareholding in the unquoted company held between the pension fund, the member personally and any other connected persons must never exceed 19%, otherwise there would be enormous tax consequences for all concerned
  3. The company concerned must not (and never should be in the future) controlled by the trustees of the pension fund in conjunction with connected parties

If the business needs the money to buy commercial premises for its trade it would be easier for the pension scheme (SSAS) to lend the money, a SSAS can lend up to 50% of net scheme assets as explained in in this fact sheet from Curtis Banks

If you are over 55, you could also consider drawing down funds from your pension, the first 25% will be tax free.

steve@bicknells.net

5 Key Tests the employer must pass to borrow from a Pension Scheme

Pension concept
There are five key tests that a loan from a Pension Scheme must satisfy to qualify as an authorised employer loan. If a loan fails to meet one or more of these tests an unauthorised payment charge will apply.

The five key tests are

  • security
  • interest rates
  • term of loan
  • maximum amount of loan and
  • repayment terms.

Security [S179, Sch 30]

If a registered pension scheme makes a loan to an employer the amount of the loan must be secured throughout the full term as a first charge on any asset either owned by the sponsoring employer, or some other person, which is of at least equal value to the face value of the loan including interest.

If the asset used as security is taxable property then there may be additional tax charges under the taxable property provisions if the registered pension scheme is an investment regulated pension scheme.

Taxable property consists of residential property and most tangible moveable assets. Residential property can be in the UK or elsewhere and is a building or structure, including associated land, that is used or suitable for use as a dwelling. Tangible moveable property are things that you can touch and move. It includes assets such as art, antiques, jewellery, fine wine, classic cars and yachts.

Interest Rates [S179, Sch 30]

All loans made by registered pension schemes to employers must charge interest at least equivalent to the rate specified in The Registered Pension Schemes (Prescribed Interest Rates for Authorised Employer Loans) Regulations 2005 (SI 2005/3449). This is to ensure that a commercial rate of interest is applied to the loan.

The minimum interest rate a scheme may charge is calculated by reference to 1% above the average of the base lending rates of the following 6 leading high street banks:

  • The Bank of Scotland
  • Barclays Bank plc
  • HSBC plc
  • Lloyds TSB plc
  • National Westminster plc and
  • The Royal Bank of Scotland plc.

The average rate calculated should be rounded up as necessary to the nearest multiple of ¼%.

Term of Loan [S179, Sch 30]

The repayment period of the loan must not be longer than 5 years from the date the loan was advanced. The total amount owing (including interest) must be repaid by the loan repayment date.

Maximum Amount of Loan [S179, Sch 30]

Section 179 (1)(a) of Finance Act 2004 restricts the amount of a loan which can be made to a sponsoring employer to 50% of the aggregate of the amount of the cash sums held and the net market value of the assets of the registered pension scheme valued immediately before the loan is made. These restrictions are necessary because although such loans provide a useful source of business funding, there may be liquidity problems for the scheme if there is a sudden requirement to provide scheme benefits. It may also not be prudent to lend scheme funds to one company.

Repayment Terms [S179, Sch 30]

All loans to employers must be repaid in equal instalments of capital and interest for each complete year of the loan, beginning on the date that the loan is made and ending on the last day of the following 12 month period – known as a loan year.

Often Land and Commercial Property are used as the security for Pension Scheme loans but the problem is having first charge over the asset!

steve@bicknells.net

5 reasons to move business premises into your pension?

A donut store, bakery, fish and chips store and a pet shop

Often business premises are owned by the business, this could be for many reasons for example the business has multiple owners or it helps to increase the business net worth.

But in many cases it would be better for the premises to be owned by the business owners pension fund because:

  1. The object of the business is not to own its own property, the objective should be for the business to make profits from trading
  2. The business could use cash tied up in the premises to invest in trading activities
  3. Pensions are a very tax efficient method of ownership – no capital gains, no tax on rental profits
  4. Company Pension Contributions are Tax Deductible and Individual contributions get income tax refunds
  5. You may be able to use 3 year Carry Forward to get funds into your pension scheme

In summary to move your business premises from your business to a SIPP or SSAS pension you would do the following:

  • Find a lender prepared to lend a third of the property value to your pension scheme  (which will be half the value of the fund ie if the property was valued at £300k, your pension could borrow £100k which is 50% of the £200k which will need to be funded by your pension scheme)
  • Have the premises independently valued and rent assessed and appoint solicitors
  • Create a SSAS or SIPP pension (you can include other people in your SSAS or SIPP investments)
  • Transfer into your SSAS or SIPP any funds you have in other pension schemes
  • As you are the business owner and its your pension scheme your business could make a payment into your pension scheme, the maximum for the last 3 years would be £140k (£50k + £50k + £40k) see details of NRE
  • The pension contribution from your company could be an In Specie payment (meaning its in kind not cash)
  • You could make a personal payment to your pension and if you are a higher rate tax payer your will get a tax refund via your self assessment return
  • Then your pension scheme buys the premises from your business and rents it back to the business

steve@bicknells.net

Did you know …. you can lend money to your own pension

Pension background concept

If you have a SSAS or a SIPP Pension you will probably want to invest some of your funds in Commercial Property – Shops, Office, Industrial Units. Pension funds can borrow money and with the current interest rates low and yields as high as 10%, you can increase your return and use less cash by borrowing.

But one thing you may not know is that connected parties can lend to the fund…

Trustees of registered pension schemes may sometimes wish to borrow funds, for example to enable them to purchase an asset. There is no objection to a registered pension scheme borrowing funds for any purpose providing that the scheme administrator/trustees are satisfied that the borrowing will benefit the scheme and that the borrowing is within the rules laid down by the Department for Work and Pensions (DWP).

A registered pension scheme is treated as borrowing or having a liability of an amount, if that amount is to be repaid or met from cash or assets held for the purposes of the pension scheme.

A registered pension scheme may borrow funds from any individual, company or financial institution whether or not they are connected to the scheme, but any borrowing from a connected party which is not made on commercial terms will be subject to a tax charge – see RPSM04104020 .

http://www.hmrc.gov.uk/manuals/rpsmmanual/rpsm07104010.htm

This is useful where you have paid in the maximum allowed pension contributions but you still have cash, so you could lend to your pension to buy a property.

steve@bicknells.net