Pension Case Studies

Problem

Anne was a Self Employed client who owned her own retail business which had been making substantial profits over the last 5 years, i.e. in excess of £215,000, but who had only built up pension funds to the value of £150,000. She wished to purchase the commercial property her business was currently trading from for £830,000. Anne was considering her pension fund as a means of ownership of the property and had been informed that this option would not be possible due to the changes to the new borrowing procedure introduced after 6 April 2006. Her accountant then referred her to us.

Solution

We explained the benefits that purchasing the property through the pension scheme would bring. Anne's business would be able to pay rent for the property to her pension fund rather than a landlord, and the business would benefit from having the rent treated as a business expense for tax purposes. As the rental income paid to the pension fund would not attract tax, Anne would effectively be able to move money from her business into her pension fund without paying income tax on it. There would also be a further tax break when the property was finally sold as all of the profit would go to the pension fund, whereas if the business purchased the property directly, or Anne bought it personally, there would be substantial tax to pay at the point of sale on all the profit. We then explained the process by which we could achieve this for Anne.

Clients have been disappointed that the purchase of commercial property by a pension fund has been somewhat restricted by the new A Day rules. Previously a personal pension fund could borrow up to 75% of the property purchase price plus costs; however, this is now limited to 50% of the net value of the underlying pension assets. Whilst for many this has had a dramatic affect on the ability to fund future purchases, it can be mitigated slightly by making higher pension contributions as current legislative provisions allow individuals to contribute up to 100% of their salary, subject to a maximum of £215,000 each year. It is however possible to contribute more than this in one year by utilising the new concept of Flexible Pension Input Periods. It works like this: Each pension input period will normally be a period of 12 months commencing on the day of the first contribution and each anniversary after that. However, it is possible for the first (or indeed any, but only one in the lifetime of the scheme) single scheme year not to be 12 months meaning that for tax year 2006/07 for example it is possible that the client could make two contributions of £215,000 over a period of days. This would result in the pension fund increasing substantially in value, with a subsequent positive effect on the possibilities for property purchase.

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