26 November 2014 This document is for financial adviser use only. It is provided for information purposes and should not be construed as advice or as an invitation to buy, sell or enter into any transaction. All statements concerning tax are based on our understanding of the law and HMRC practice as at the date of the document. Tax laws are subject to change and any changes may be applied retrospectively. Whilst every effort has been made to ensure accuracy, no liability can be accepted for errors or omissions. No information should be relied upon by retail clients.

Pension Led Funding How can my pension help my business?

Introduction:

The UK business angel network “Angels Den” recently reported that 59% of start-up businesses had

been rejected for a bank loan to kick-start their business in the last two years (Source: TaxAssist

News Release 11 September 2014).

As an increasing number of businesses look outside traditional bank borrowing to fund their

development plans, this article looks at the various ways in which “self-administered” pension

schemes can aid business funding – for both start up and established firms.

It should be noted that this article highlights what is “possible” under the rules and not all pension

operators will facilitate all options.

26 November 2014 This document is for financial adviser use only. It is provided for information purposes and should not be construed as advice or as an invitation to buy, sell or enter into any transaction. All statements concerning tax are based on our understanding of the law and HMRC practice as at the date of the document. Tax laws are subject to change and any changes may be applied retrospectively. Whilst every effort has been made to ensure accuracy, no liability can be accepted for errors or omissions. No information should be relied upon by retail clients.

Property Purchase

Regardless of whether a firm is looking to buy its first premises or move to a new location, Self

Invested Personal Pensions (SIPP) and Small Self-Administered Schemes (SSAS) can be used to help

fund the purchase.

The pension scheme becomes the legal owner of the property and typically leases it back to the firm

to operate from in return for a market rate of rental income.

The “funding” for such an exercise can be achieved in a number of ways – e.g. by making a

contribution to a SIPP or SSAS, by consolidating previous pension benefits and/or by combining the

pension contributions/previous pensions of fellow directors to maximise purchasing power.

In addition, a pension fund is permitted to borrow up to 50% of the overall net asset value it holds –

again boosting the potential value of property that can be purchased.

Why might you consider this?

Any pension contributions paid personally by the directors normally attract income tax relief

at the individual’s highest marginal rate*

Any employer pension contributions are usually corporation tax deductible*

Any rental payments made by the firm are corporation tax deductible

Consolidating existing pension savings may make them easier to manage and may help

reduce charges

Rental payments are enhancing the directors pension savings rather than being paid to a

third party

Once inside the pension wrapper, the scheme pays no tax on the rental income it receives

and there is no capital gains tax to pay on the subsequent sale of the property

The property may be able to be held within the scheme for the benefit of future generations

upon death – and hence can be useful for succession planning.

* See notes

Phased / Joint Purchase

There are restrictions on the level of tax privileged contributions that can be paid each year to a

pension scheme. Therefore, it may be the case that there are insufficient pension funds available to

purchase the entire property, even after allowing for the amount the scheme can borrow.

In this situation, it is perfectly acceptable for the pension scheme, the company and/or the directors

acting in a personal capacity to complete a joint purchase to ensure the property is bought outright.

Alternatively, it may be possible for the pension scheme to purchase a proportion of the property

now and add to it in subsequent years – e.g. potentially purchasing and occupying one floor/office

initially before expanding the following year.

26 November 2014 This document is for financial adviser use only. It is provided for information purposes and should not be construed as advice or as an invitation to buy, sell or enter into any transaction. All statements concerning tax are based on our understanding of the law and HMRC practice as at the date of the document. Tax laws are subject to change and any changes may be applied retrospectively. Whilst every effort has been made to ensure accuracy, no liability can be accepted for errors or omissions. No information should be relied upon by retail clients.

Also, if the scheme owns the whole property but the firm only needs to occupy a part of it, it may

lease space to a third party who would pay rent in the normal commercial manner to the pension

scheme.

Sale & Leaseback

If the company already owns its own premises it may decide to “sell” some or all of the property to

the pension scheme, thus injecting capital into the firm. The pension scheme can then lease the

premises back to the company in return for a market rate rent. Bear in mind that if the property

value has increased during the period the company has owned it then a capital gains tax charge may

apply.

“Bricks and Mortar” Contribution

Often there may be a desire to transfer ownership of property from the company to pension scheme

ownership, but there may be insufficient pension funding available to enable this to happen – such

as insufficient cash flow to make a cash contribution.

In this scenario the firm may elect to make a “contribution” in the form of some or all of the

property – i.e. contributions don’t necessarily have to be made in cash form. This qualifies as a

deductible item against Corporation Tax in the same manner as a cash contribution. The company

would then be required to pay a market rate of rent to the pension scheme for the continued use of

the premises, which again is deductible against Corporation Tax.

Business Loans

Whilst both SIPP and SSAS schemes can lend money, the rules applicable to both are quite different.

Whereas a SIPP can only lend to unconnected third parties, a SSAS can lend money to the employer

sponsoring the scheme.

In terms of value, up to 50% of the assets of the scheme can be lent – however this must be on a

secured basis with repayments made on a capital and interest basis over a maximum term of 5 years

(although it may be possible to “roll over” a loan).

This could be an attractive option as opposed to bank finance and of course has the added benefit of

interest payments being made to the pension scheme for the benefit of the directors rather than a

bank.

However, it should be borne in mind that should repayments not be made, ultimately the pension

benefits will be reduced and there may also be penalties imposed by HMRC.

26 November 2014 This document is for financial adviser use only. It is provided for information purposes and should not be construed as advice or as an invitation to buy, sell or enter into any transaction. All statements concerning tax are based on our understanding of the law and HMRC practice as at the date of the document. Tax laws are subject to change and any changes may be applied retrospectively. Whilst every effort has been made to ensure accuracy, no liability can be accepted for errors or omissions. No information should be relied upon by retail clients.

Share Purchase

The money held in both SIPP & SSAS can be used to buy shares in a trading company, whether or not

those shares are traded on a stock exchange. It is therefore possible for the pension scheme to

purchase shares in the firm.

Where a SSAS is used to acquire the shares of a sponsoring employer, HMRC rules dictate that the

market value of the shares at the date of purchase must be less than 5% of the scheme value. Where

there is more than one sponsoring employer in the scheme then it is possible to utilise up to20% of

the scheme assets to purchase shares – with the caveat that the 5% cap applies on shares purchased

in any one of the employers involved.

Directors Loans

Whilst it must be remembered that the “sole purpose” of a pension scheme must be to provide

member benefits, it is possible for company directors to inject capital raised through the drawing of

such benefits back into their business.

Generally speaking, members aged 55 or over can draw 25% of their pension fund as a tax free lump

sum. Some business owner may prefer to re-direct this source of capital into their business rather

than go through a typical bank sourced loan facility with the associated underwriting that would

entail.

In addition, should a director wish to utilise their pension funding for the benefit of the business this

would increase their Directors Loan Account – which in turn could be used for various purposes

including additional pension contributions back into the scheme if so desired, although care would

need to be taken to ensure this did not fall foul of HMRC’s recycling rules.

Summary

There has been much speculation that the forthcoming changes to the manner in which retirement

benefits can be drawn from April 2015 will see the creation of “pension bank accounts”. However,

caution has to be exercised when considering the use of pension funds for business funding

purposes and we would always recommend to clients that they seek professional advice before

proceeding.

Should you wish to discuss any particular client scenarios please contact our Business Development

Team on 0141 772 3365 or email info@yorsipp.com.

26 November 2014 This document is for financial adviser use only. It is provided for information purposes and should not be construed as advice or as an invitation to buy, sell or enter into any transaction. All statements concerning tax are based on our understanding of the law and HMRC practice as at the date of the document. Tax laws are subject to change and any changes may be applied retrospectively. Whilst every effort has been made to ensure accuracy, no liability can be accepted for errors or omissions. No information should be relied upon by retail clients.

Notes

1) Income tax relief is available on personal contributions of up to £3,600 or the individual’s

gross annual income if higher.

2) Personal contributions are paid net of basic rate tax with any entitlement to higher or

additional rate relief being claimed back from HMRC.

3) Employer contributions will be deductible as an expense provided they are incurred wholly

and exclusively for the purposes of the employer’s trade or profession.

4) Any contributions above the annual allowance (£40,000 in the tax year 2014/15) will be

subject to an annual allowance tax charge. All personal, employer and other 3rd party

contributions, whether cash or in-specie, are combined for this purpose. The excess above the

annual allowance is added to the member’s income in that tax year and taxed at the

applicable rate.

5) It may be possible to carry forward any unused annual allowance from the previous 3 tax

years to maximise the contributions that can be paid by or on behalf of a member before an

annual allowance tax charge is triggered.