In April, the Chancellor announced some new restrictions on pension contributions for people earning over £150,000. Some commentators have speculated that this may be the thin end of the wedge and that the relief maybe reduced even further in future. Some government amendments have just been made to the Finance Bill and while they are welcome, they are relatively minor. Higher rate taxpayers will therefore be wondering how to make the most of the current regime while it still exists.
Many self employed individuals, partnerships and companies have taken advantage of the current rules to acquire a building from which to run their business with a substantial tax subsidy.
Individuals can make pension contributions net of 20% tax. Higher rate taxpayers with incomes up to £150,000 are given a further 20% relief through their tax returns. A partnership wishing to acquire a new building for £750,000 could simply go out and buy it, either directly if they have the cash, or with a loan.
Using a pension fund, they could obtain 40% tax relief and pay only £450,000 for the same building. By setting up a pension fund, they could make contributions attracting tax relief of 40%. The pension fund would then buy the building and rent it to the business.
The tax breaks don’t stop there. Firstly, the rent paid by the business is tax deductible for the business and tax free in the pension fund. Secondly, any capital growth – and property prices are currently low – will be free of capital gains tax. Thirdly, there may be a VAT break (but space is too short to go into detail here).
Most people cannot afford to make substantial contributions and the maximum is capped at the level of a person’s earned income anyway (subject to an overall limit and some complex rules contained in the Finance Bill). Generally, people using this arrangement to buy a building pay in over several years, but it may be worth considering making substantial contributions now. The pension fund can also borrow – within limits – to help fund the purchase. The fund’s income will be secure as long as the business can pay the rent and as a market rent must be used, the rate of return can look very attractive when compared to other types of pension. The rules are different for companies, but significant tax savings are still possible.
This is a very brief explanation of a complex area, but one that can secure substantial tax relief. As with any tax planning, expert advice is essential. And while the sun is shining...
Paul Aplin is a tax partner with A C Mole & Sons and
recently stepped down as Chairman of the Institute of Chartered Accountants in England & Wales Tax Faculty.
