Property or Pensions? Why not both and what value can it bring?

Foxes Ltd has profits of £200,000 and is interested in purchasing the property which the company is currently renting. The purchase price is £500,000.

Their SSAS is currently valued at £600,000 however the schemes assets are illiquid e.g. vested in another property and so cannot be used to purchase the property directly. Their SSAS could, however, finance the purchase of the property in the following way:

• Employ SSAS specialists to provide guidance on the property purchase

• Company to make pension contributions to its’ members of £200,000, taking into consideration the individual’s allowances and utilising carry forward relief where available

• Secure lending from a mortgage company of £400,000 (over 10 years) against a first charge over the property being bought (alternative property within the SSAS could also be used)

• The mortgage repayment (c. £3,500 per month) would be met from the receipt of rent and possibly further pension contributions (if needed).

The alternative method, to purchase the property, would be for the company, its’ shareholders or for the individuals to buy it personally, however, these methods do not generate the same tax-savings.

Initial savings

By utilising the SSAS and contributing company profits into the pension scheme the company makes an initial corporation tax saving of £38,000 (Based on 19% and a contribution of £200,000 into the SSAS). In comparison, if the employer paid the members (say 2 directors) sufficient dividends to allow for £200,000 to be utilised for the purchase personally then it would have meant dividends of approximately £268,500 would have been paid equating to a saving of circa £68,500 in comparison to a company purchase or £106,500 if purchased in the pension scheme utilising contributions (£38,000 + £68,500).

Please note that rents received and further contributions are fully tax exempt in the SSAS.

Investment returns

Capital appreciation aside, rental income is by far the most important aspect from a property investment point of view but the accumulation of rents in a tax-exempt fund improves yields further. While mortgage interest can be offset against company and personal income, borrowing will eventually be repaid. The attached schedule demonstrates, hypothetically, the movement of rent over a ten-year period along with capital values. Assuming that rental income is reinvested within the scheme, at 6% per annum compound compared to a taxed position, then this scenario demonstrates an increase in the accumulated return of circa 37% or 67% over a twelve year period (£825,036 in the pension scheme compared to £559,368 in the company or £495,018 personally).

The company could further enhance their returns by not requiring a mortgage at all. The funding shortfall can be met by transferring other pensions or appointing other family members/directors and using their contribution allowances or carry forward relief.

Advantages

1. Initial tax saving of £38,000 (compared to a company purchase) or £68,500 (compared to a personal purchase) on the initial £200,000 capital (based on the prevailing rate at the time)

2. An improvement in the overall rental return and appreciation of circa 37% (company) or 67% (personally)

3. Tax savings in the pension scheme allows for a faster repayment of the loan

4. Inheritance Tax (IHT) exempt since the trust fund assets are not deemed to form part of any member’s estate

5. The scheme assets grow free of Income Tax, Capital Gains Tax and IHT under current rules

6. Pension fund assets are secure from either the company’s or the member’s creditors

7. The SSAS assets do not specifically have to be used for pension benefits but could be left to future generations or be perpetuated through the generations

Disadvantages

1. Property can create liquidity issues if the asset needs to be sold quickly to fund death benefits (if cash is required) or upon divorce

2. Increases in the value of the property cannot directly be used to secure further borrowings by the company, however a re-mortgage for a higher amount could be arranged

Rental returns available to a tax-exempt pension fund compared to a company based and personal taxed environment

We strongly recommend you seek advice from a financial adviser before applying. We cannot give you any advice about whether a SSAS is suitable for you or what you should invest in as we are not regulated to provide this service. If you are not sure about where to obtain advice, we suggest you contact Unbiased Ltd, which is an industry body responsible for promoting independent financial advice in the UK, or the Personal Finance Society (PFS). They will be able to give you details of a financial adviser in your area and whether they have specialist pensions qualifications. We also recommend that you check to see the adviser you select is properly authorised by the Financial Conduct Authority (FCA) and this information can be checked on their website.