One of many tax advantages of a Fiscal Property Plan (FPP)
If you are restricted to writing down a small percentage of Capital Allowances each year, an FPP could significantly accelerate the tax relief available.
An FPP takes maximum advantage of statutory tax reliefs and exemptions, therefore, maximises tax reliefs and tax exemptions as prescribed by HMRC.
Owning a commercial property is key in taking advantage of an FPP and securing tax savings for both you and your business.
Where property is held within a Company, Partnership or owned by individuals understanding the tax implications and risks of unforeseen events is crucial.
Pushing the boundaries of tax planning isn’t required in ensuring you and your business is tax smart.
A brief insight and case studies.
Scenario: Directors own commercial property personally
- Bill and Shirley run a successful business, making a good level of profit.
- They jointly own a commercial property (from which they trade) personally and is worth £250,000. The rent paid to them is £20,000 per annum. The property has not increased in value significantly from date of purchase.
- Bill and Shirley have small pensions and haven’t made any contributions for a number of years.
- They decide to sell the property to the company, creating a credit loan account for them to draw on.
- They then set up an SSAS called The Bill and Shirley Family SSAS. The company makes an in specie contribution of the property to the pension fund, utilising unused carried forward pension allowance. Corporation Tax Relief is available on the contribution.
- The property was sold to the company at its market value (determined by a valuation by a RICS registered surveyor) for £250,000.
- Credit Loan Account of £250,000 on which Bill and Shirley can draw on cash flow permitting TAX-FREE
- Saving tax of 32.5% potentially £81,250
- SDLT payable on the purchase by company of £2,000
- A Balancing Allowance enabled the majority of the Capital Allowance Claim of £50,000 to be used by the individuals with the remaining allowances transferred to the Company.
- The company makes an in specie contribution to the property the Bill and Shirley Family SSAS
- Corporation Tax relief at 19% = £47,500 saving in corporation tax!
- Stamp Duty Land Tax (SDLT) payable by the Bill and Shirley Family SSAS £2,000
- Rent is paid by the company to the SSAS rather than to Bill and Shirley personally
- All rent received into the SSAS is TAX-FREE
- The company gets Corporation Tax Relief on the rent at 19% as before.
Summary
| Total Tax Saving | £ |
| Personal Tax @ 32.5% | 81,250 |
| Corporation Tax | 47,500 |
| Less SDLT £2,000 x2 | 4,000 |
| Total Tax Saving | 124,750 |
| Plus, Accelerated Capital Allowances generated | £10,000 |
Plus 3 years rent now accumulated in the SSAS
| Value of SSAS assuming no capital growth | |
| Property | £ |
| 3 years rent | 250,000 |
| Total Value | 60,000 |
Scenario: Business wants to purchase new trading premises
- Mr and Mrs Jones set up a fabric, curtain/blind manufacturing and installation business four years ago. The business has done well, increasing profit and turnover annually. They have traded from a rented shop and made the curtains and blinds from a separate rented unit which is several miles away.
- They want to relocate to a better location and premises where they can manufacture in the same location as the retail shop and have seen a potential property which would fit the bill currently on the market for £350,000.
- Their bankers do not have the appetite for lending as they don’t have sufficient cash in the company to fund the 30% deposit which the bank required.
- They have good pensions and collectively have £280,000 between them (Mr Jones £190,000 and Mrs Jones £90,000), although they are not increasing significantly in value due to a poor performance of the investments.
Solution
- Establish an SSAS and transfer of current pensions
- Explore bank funding to the SSAS for the balance of £70,000
- Make a contribution to the SSAS from the company to cover the professional costs and stamp duty of approx. £10,000
Why?
- Stamp Duty on the purchase of the property will be £7,000, Legal Costs and searches £3,000
- The £10,000 contribution to the SSAS attracts Corporation Tax Relief 19% so actual cost is £8,100
- Rent payable by the company of £35,000 per annum attracts Corporation Tax Relief for the company on the rent at 19% so the actual cost is £28,350.
- There is no tax on the rent in the SSAS, however, £35,000 income going in annually.
- The bank loan of £70,000 is repaid out the rent.
- Debt is repaid within 4-5 years, annual income continues into the SSAS, growth in property.
- Trade in enhanced by the use of new premises.
- Making pension funds work along with capital.
SSAS set up and registered with HMRC then the existing pensions transferred in and funded as follows
| Jones Family SSAS | £ |
| Mr Jones Pension Transfer | 190,000 |
| Mrs Jones Pension Transfer | 90,000 |
| Contribution from company to cover costs | 10,000 |
| Bank Loan (Borrowing) | 70,000 |
| 360,000 | |
SSAS in 10 years’ time
| Jones Family SSAS | £ |
| Property (Estimate Value) | 400,000 |
| 10 years rental @ £35,000 | 350,000 |
| Debt repaid (including interest) | (82,000) |
| Investment return on cash held (Est 5% p.a) | 58,200 |
| 726,500 | |
Scenario: Cash/Investment rich company
- Two directors, Time and Steve run a successful company, both are married and both are in their mid 50’s. They have built up considerable cash reserves and purchased a couple of investment properties in the company.
- Concern has been raised over the investment/cash balances held in the business being;
- Exposed to creditors
- Could jeopardise Entrepreneurs Relief on the sale of the shares in the business
- IHT reliefs (if investment > 50% value then no Business Property Relief on death!)
- Both have a pension but have not contributed for a number of years. They have previously been against pensions and are investment risk adverse. Their wives also have small pensions via their previous employment outside the company. Each of the wives works in the business.
Solution and Benefits
- Wives made directors.
- SSAS set up for the benefit of all four directors.
- The company makes a large single contribution for each director, up to the unused allowance, so £160,000 each, or they transfer a commercial property into the SSAS to the value of £160,000 x 4 + £640,000.
- If the property is transferred, the Property Capital Allowances can be used to offset taxable rent from other commercial properties held by the company or, a balancing allowance could be applied if no other investment property is held.
- Corporation Tax Relief on all contributions at 19% so saving £121,600 in Corporation Tax.
£640,000 of value is taken off the balance sheet and away from creditors. - Funds held in SSAS free of Inheritance Tax.
- The fund can be used to invest in other commercial property/investments in – SSAS. (The tax-free wrapper)
- As children become of age, they can join as members of the SSAS, enabling further Annual Allowance and Lifetime limits to be used.
- SSAS provides full access to tax-free cash and income from age 55.
Scenario: Company owns property with a loan
- Mr and Mrs Long currently run a successful restaurant business and had the business premises held by the trading company.
- Their accountant suggested that they should look at moving the business premises into an SSAS, as this would be more tax efficient for the business, enabling them to repay the current loan on the premises sooner than they were scheduled to do. Provide them creditor protection on the business asset, allow them to build up a retirement fund, remove any liability to Capital Gains Tax on future growth in the property value.
- The business was trading well, making a good profit, but there was limited cash to make SSAS contributions. They also wanted to look at reducing their corporation tax liability.
- Restrictions that they had were the current loan outstanding on the property to the bank for £120,000. They only had a total value of £50,000 held in the pension between them and had made no contributions in recent years.
- The property is currently valued at £400,000 and was purchased in 2012, but has not increased in value since. Rental yield was £28,000 p.a
Solution
- They set up an SSAS.
- Transferred their existing pensions to the SSAS.
- SSAS company provided access to a special refinance arrangement.
- This provided a short-term loan to the company of £220,000.
- They cleared off the bank loan of £120,000.
- Made an additional contribution to the SSAS of £100,000. SSAS then borrowed a further £70,000, from a bank to part purchase the commercial property (£220,000). This cleared off the short-term loan.
- The company made a cash contribution to the pension of £20,000 to cover costs.
- The remaining value of the property (180,000) was transferred to the SSAS as an ‘In Specie’ contribution.
Benefit
- The outcome for Mr and Mrs Long was that the property is now held in the SSAS.
- The retrospective Property Capital Allowance Claim based on the 2012 company cost was maintained by the company to recover corporation tax and reduce taxable profits in future years.
- The rent payable by the business is still tax deductible for the company but received tax-free in the SSAS and allows the SSAS to accelerate the loan repayments as there is no tax to be paid.
The initial tax savings to Mr and Mrs Long’s company were
| Company pension contribution | £300,000 |
| Corporation Tax saved | £57,000 |
| SDLT payable | £(9,500) |
| Net tax savings | £47,500 |
| Plus, additional Capital Allowances generated | £10,000 |
Additional long-term tax savings would also include, tax on the rent; Capital Gains Tax, Inheritance Tax. Value of the pension fund in ten years could be:
| Property Value | £500,000 |
| Rent x 10 years @ £28,000 less repayment of loan and interest (280,000 – 84950) | 195,050 |
| Pension Value | £695,050 |
If you would like to know more about an FPP or feel an FPP could benefit you, please get in touch.
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