Q I AM a director of a family business and am keen to save for the future. I really don't want to tie my money up into a pension scheme until I retire. However, I have heard that I could potentially use pension funds to buy our trading premises. Please can you confirm if this is possible?
A IT SHOULD indeed be possible. Depending on the level of funding required and the structure of your company you may wish - or indeed have - to pool pension funds with your fellow directors. However, I will assume here that only your pension funds are being used.
The principle is relatively straightforward. The pension fund has to be available as cash and be held in a contract which has the ability to invest in commercial property. This normally means that funds held in existing pension contracts, such as group personal pensions, are transferred and consolidated within a self-invested personal pension (Sipp).
As you would be a connected party to the property transaction, the purchase has to be carried out at arm's length for a fair market value. The price must therefore be in line with an independent valuation and the pension administrator must be happy with the property survey. This also holds for the subsequent rental agreement between the firm and the pension scheme.
If the pension holds funds to purchase the property outright the transaction can go ahead. This releases the purchase price of the property from the pension and passes it to the company. The transfer of legal ownership is normally carried out through the pension administrator, scheme adviser and your solicitor.
You should note that the proceeds from the sale of the property can be subject to capital gains tax (CGT).
If additional funding is required, however, the company could make a pension contribution to increase pension capital, normally up to an annual maximum of 50,000 per member.
Alternatively, the scheme could look to borrow money. Borrowing is limited to 50 per cent of the net pension fund, subject to the agreement of your chosen bank. It may also be possible for the company to directly transfer up to 50,000 of the property itself (per member) as what is known as an in-specie contribution.
There are significant benefits to holding your business premises in a pension scheme. Rental income paid by the company should be an allowable deduction for corporation tax purposes and is received and invested in your pension gross of tax. Growth in the value of the property is sheltered within the pension and, under current legislation, there would be no CGT applicable on disposal.
You must be aware, however, that the property becomes a pension asset and may have to be sold should you wish to draw pension benefits, or if you die.Property can be an illiquid asset and you may not be able to sell when you would wish to, or you may receive less than you would hope.
Proper planning can, however, help avoid these issues. If this is of interest you should seek specialist independent financial advice.
• Stephen Hall is a wealth manager at Cornerstone Asset Management at HBJ Gateley.
If you have a question you need answered, write to Jeff Salway, Personal Finance Editor, The Scotsman, 108 Holyrood Road, Edinburgh EH8 8AS or email: [email protected].
The above is for general purposes only and is not tailored for individual use. It does not constitute legal, financial or investment advice on any particular matter and must not be treated as a substitute for specific advice. No action should be taken in reliance of the information given. The Scotsman Publications Ltd, Cornerstone Asset Management LLP and HBJ Gateley accept no liability on the basis of this article.