Most people are aware that pensions are one of the best ways to save for retirement for business owners as they offer tax relief, the fund getting topped up by the Government for a percentage of every personal contribution made.

In addition to pension planning being a crucial part of ensuring a secure retirement, a business owner could consider pension planning as part of supporting their business when deciding how best to finance the business and to eventually realise the value built up in it.

You can consider using your pension by establishing a Small Self-administered Scheme (SSAS).  A SSAS is a regulated occupational pension scheme designed for shareholder directors of small, limited companies and is limited to 12 participants (or “members”).  A SSAS is permitted to lend money to the sponsoring employer for any purpose including capital investment or the acquisition of fixed assets, provided the qualifying conditions in respect of the loan are met.  With the increased interest rates, and it becoming more difficult and expensive to borrow, a pension loan could be the answer, whilst recognising that your pension fund is at risk if your business fails.

The restrictions on loans that can be made from the SSAS, can be summarised as follows:

• The pension fund can only lend up to an amount that does not exceed 50% of the value of the scheme’s assets. The asset being the aggregate of the cash sums and net market value of other assets held by the pension scheme immediately before the loan is made.

• The loans must be secured as a first charge on an asset of equal or greater value to the amount of the loan. (The asset charged does not have to belong to the business and the security provider does not have to be the business receiving the loan but can’t be a home). The loan can also be secured on “soft” assets such as intellectual property.

•  A commercial rate of interest has to be charged on the loan. The interest being a deductible expense for corporation tax purposes, the same as other loan interest, and is income for your pension fund. 

• The loan must be for a fixed term (the maximum allowable term is five years) and have normal commercial repayment terms.

Taking the pension planning support for your business further, if the trading company owns commercial property, consideration can be given to the SSAS being used to acquire all or part of a commercial property.  The planning has three benefits:

• The sale of the property to the pension fund, releases cash to the business, which it may require in these testing times. (A pension fund is able to borrow up to 50% of its value). 
• With the property asset being transferred to the pension fund, it is protected from future trading risks to the business.
• The disposal by the trading business could result in a taxable gain subject to corporation tax if the asset has gone up in value. However, going forward the pension fund will charge a rent for the use of the property, which is an allowable tax deduction when calculating tax and an effective contribution to your pension fund.

Another planning option that could be considered to aid the business owners with personal funding and to either reduce personal outgoings, say pay down a personal mortgage, or provide a lump sum to support living costs thereby reducing personal tax on profit extraction, is to use SSAS accumulated cash to acquire shares in the trading company.

It is common practice for business owners, to be remunerated by salary up to the National Insurance threshold, supplemented with dividends. Dividends are subject to dividend income tax, higher rate 33.75%, additional rate tax dividend income over £150,000, 39.35%. 

A SSAS can use up to 5% of its fund value to purchase shares in a participating company with an overall maximum share ownership of 20% of the fund.  For this to be allowable, the company must participate as a sponsoring company in the SSAS and acquire the shares at market value. The sale of the shares is treated as a personal disposal by the shareholders, resulting in a capital disposal subject to capital gains tax, to which the Business Asset Disposal Relief, (10% tax rate), subject to the £1m lifetime allowance should apply.

A further potential advantage is that if the value of the company grows over time, and it is eventually sold, the SSAS pays no tax on any capital gain in the value of the shares whereas personally the shareholder would have paid 10% up to their lifetime limit of £1m and 20% tax on any additional capital gain.

The above provides some examples of how a pension can give business owners various angles to help with supporting the business in these testing times, or with growth, as well as providing effective retirement planning.

A pension is a regulated financial investment and independent financial advice should be sought regarding any pension investment.  Harbour Key Limited is not a financial adviser and only provides advice on the tax benefits relating to regulated financial investments.  In using your pension fund to support your business, the fund is at risk if the business fails.

Should you wish to discuss and understand the benefits of pension planning for your business, please do not hesitate to contact the office.