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Financial planning case study: Building up nest Egg

A SSAS is the right choice for directors to restart pension saving

The problem: Egg Sample Fabrication Services Ltd, (fictitious name) is a metal fabrication company. It has been trading for 20 years and has built up a portfolio of commercial and residential properties. The clients are looking to exit the business in a couple of years or sooner if possible, and want to restructure the business, preparing it for sale. The clients have mainly been paid £60,000 a year topped up with dividends and currently have no real pension plans

Issues to look out for:

  • Selecting the most appropriate pension scheme for their needs
  • The ability to use property assets of the business as a way of funding the pension scheme
  • Tax liabilities on the transfer of ownership of the relevant property
  • The ability to ringfence the property from the rest of the business assets and so protect its value regardless of the fortunes of the business.

The solution:
Up to now, the clients have received limited taxation advice or planning advice and felt that they could benefit from a change of accountant, who subsequently suggested a combined approach with ourselves.

After much consideration, we have agreed with the clients to start the first part of their pension planning, which is to effect an SSAS to make provision for their pensions, which have been sadly unfunded for many years.

The reason for choosing the SSAS as a means to provide a pension fund was due to a number of circumstances common to business owners but in particular the unique opportunity afforded by the SSAS which allows the directors to make an inspecie contribution of the commercial property. The establishment of the SSAS will exploit a set of conditions, including depressed property values, low interest rates and the near tax neutrality of an inspecie contribution.

Transferring the property owned by the business will:

  • Provide considerable funds for retirement for the directors and senior employees
  • Limit the capital gains tax payable on any future growth in value of the buildings, particularly in light of potential uplifts in value in the longer term
  • Knowing that the buildings are to be sold in the future, either as part of a sale of the business or in their own right means the decision has been taken while it is considered good value.
  • Allow the business to potentially exploit the loanback facility offered by an SSAS, where the scheme can lend back to the business up to 50 per cent of net scheme asset values
  • Preserve the value of the property for enjoyment by the directors, irrespective of the economic success of the business
  • Use the long-term rental payments payable by the business as effective pension contributions to the scheme.

The directors would establish a SSAS, making at least the two directors members of the scheme and, if desirable, other employees such as spouses.

Upon establishing the scheme, Egg Sample Ltd would consider making contributions to the plan to fund the pensions of the members. The company would make a commitment to contribute a predetermined sum (the value of the property) to the pension plan.

Having decided that the company may not have sufficient cashflow to make such a significant contribution from cash, the company would settle the “debt” created by the commitment by asking for the property to be taken in consideration of the debt.

This would mean the property would transfer to the ownership of the pension plan, albeit with a capital gains tax charge and quite possibly a charge to stamp duty land tax.

The CGT would likely be offset by a charge to the company profit and loss account where corporation tax relief would be applied. SDLT, however, is unavoidable.

While the pension scheme is a considerable undertaking, it is merely the start of a process of ensuring the directors of Egg Sample Ltd has adequate provision for their retirement.

Each director should also seek further advice in relation to how they continue to structure their personal affairs to ensure they make the best use of reliefs, trusts and allowances available to them in conjunction with the scheme.

This is a relatively in-depth but straightforward process that can and should be followed through beyond scheme establishment.

Ian Hudson is principal of Hudson Green & Associates

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