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 ‘Two tax year’ contribution opportunity window is closing

11 February 2018

Jeff Steedman, head of SIPP/SSAS Business Development at Xafinity, looks at ways to improve the pension provision and reduce future tax liabilities of the company directors in the run up to the end of the tax year.

It amazes me just how many clients in 2018 “have no pension provision at all” and yet they have ambitious plans for their business and pension.  Many of these successful entrepreneurs simply see their business or their property as their pension.

There is however a great financial planning opportunity at this time of year to make some excellent inroads into improving the pension provision, and reducing future tax liabilities, of the company directors.  This is mainly due to the proximity of the 2017/18 tax year-end.  Companies can pay contributions across two tax years, thus maximising annual allowances.  There is the added bonus of reducing future company tax liabilities, which always pleases the company accountant.

Case study – the joint SIPP and the commercial premises

Whilst a “joint (or family) SIPP” can be set up for 2 or 22 members, the most common scenario we see is a “Mr & Mrs” operated small company, so let’s use that as the basis for our Case Study:

  • Two directors – husband and wife in their 40’s – both have no pension provision
  • They own their business premises personally and it is worth £200k
  • They have a personal mortgage of £100k after they paid £180k for the property 3 years ago
  • The company is trading well and is expected to make large profits before the company year-end of 31st May 2018

The solution

The clients discuss their options with their financial adviser and their accountant.  They conclude that bringing the company premises into the pension scheme has material tax advantages, and the following joint SIPP pension structure is set up:

  • A SIPP bank account is opened for both individuals in February/March 2018
  • The company makes a £40k cash contribution to both individual SIPPs
  • The property is independently valued by a RICS registered valuer at £200k and it is confirmed that the property is not “opted to VAT”
  • The open market rental value of the property is set at £18k per annum by the valuer
  • On 7th April, the Company pays a further £40k in company contributions for both directors
  • At this point the Joint SIPP will have assets of c£160k after set up fees – it now has a maximum borrowing capacity of £80k
  • The joint SIPP can now readily borrow sufficient cash from the bank to finance the property purchase

The outcomes

The various parties involved are affected by tax and cash flow in the following ways:

The clients personally

They have sold a personal asset – selling their commercial property affects them as follows:

  • Their £100k mortgage is fully repaid following completion of the sale
  • They will receive £100k in cash being the net proceeds from the sale of the property
  • They will no longer have to pay the mortgage payments
  • However, they can no longer use that property asset as security for any borrowing/overdrafts, and
  • They may face a “capital gains tax charge” for the sale of the property, but they have personal CGT allowances to take into account

The company

  • The Company has made pension contributions of £160k in total between now and 7th April 2018
  • This is likely to result in much reduced corporation tax for the company year end
  • The Company must now lease the property from the joint SIPP – paying a market rent of £18k per annum
  • This rental payment to the SIPP can be considered a company expense and therefore reduce future corporation tax the company pays

The future growth of the SIPP & its mortgage

The Joint SIPP can grow in two ways:

1. Rental income of £18k per annum

2. Any capital growth in the value of the property – and this is free from future Capital Gains Tax now it’s owned by the SIPP.

In the first 5 years or so, the rental payments can be used by the joint SIPP to repay the pension mortgage.  Once repaid, the property is effectively 100% owned by the SIPP and the residual rental income can then be re-invested into other investments/funds.

The future – what happens if?

Of course, things can change but a joint SIPP can deal with:

  • Divorce of the members
  • One member transferring out
  • Death of a member
  • Addition of new members
  • Sale of the company & new tenants

It is truly the most flexible of products.

Professional Paraplanner