22.6.2022 | Tax

How to use property & business premises to build a healthy pension pot

Head of taxation at Beatons, Andrew Diver, gives his advice on two efficient ways of preparing your finances for retirement years.

Pension planning can be an overwhelming thought, and many people may take a ‘hope for the best’ attitude towards ensuring they will have adequate income in later life. Some will have ‘pension pots’, which could be standard pension accounts or might be property or similar.

But do you have a plan for your retirement years, and are you aware of how to manage your pension investments?

Property as a pension fund

Many people still remember the headlines of pension fund failures such as Equitable Life and the Mirror Group, when owner Robert Maxwell looted cash from the company’s pension fund.

As a result, not everyone trusts their money to a pension fund, preferring to invest more directly into assets such as property, where they can more directly improve its value through property improvements.

Residential Property can be a good investment but cannot be held directly within a pension fund. Whilst Beatons cannot provide investment advice, it is interesting to note that in general terms, share prices (represented by FTSE 100) and UK house prices have, since 2015, broadly kept pace with each other; however, there is more volatility in shares.

That doesn’t mean there aren’t drawbacks to investing in property, and investors should be mindful of the additional tax costs associated with doing so.

Tips for choosing the property as part of a retirement saving plan

Tip 1:  Consider who is going to be the beneficial owner of any property? Is it more tax efficient in terms of tax on rental income and capital gains, for it to be held jointly or solely by a spouse?

Rental income can also have the effect of reducing the level of personal allowances or result in the clawback of child benefits, for example.

Tip 2: If you have a high rate of income tax and high mortgage interest payments you might wish to consider transferring properties into a limited company as there are no restrictions on the extent to which mortgage interest can be set against rental income.

Tip 3: Keep a surplus of cash if you invest in property to meet any immediate needs. Properties can take time to sell and turn into cash and there are costs associated with selling (legal fees, estate agents etc).  You may also be required to pay capital gains tax. This tax would be due within sixty days if you are selling a residential property.

Tip 4: If you have surplus buy-to-let properties you might consider transferring these into a trust which can prevent capital gains tax charges and potentially prevent inheritance tax being payable on the property in the event of your death.

Beatons can advise on any matters related to property as a pension fund.

Turning business premises into pension funds

One of the most tax-efficient ways for owners of limited companies to operate is for the business premises to be held in a pension fund.

Tax-free growth
If the company was the original owner, the proceeds can be paid from a pension fund into the business to help cash flow.  As the property increases in value, it benefits from the tax-free environment that the pension offers.

Increased payments into the pension fund

The company could then make rental payments for the premises which would go into the pension fund.  This enables the company to effectively contribute more to the pension fund each year than simply the £40,000 annual pension allowance (or a lower tapered amount for higher earners).

Another element of considering business premises as a pension fund is that the fund can also borrow up to 50% of the purchase price, to purchase property (subject to lenders’ criteria and trustees’ agreement). Therefore, it may be possible to purchase the company business premises even if there are currently insufficient funds in the pension scheme.

Having the business property in a pension fund can have multiple benefits.  Removing the company premises from the company balance sheet removes it from the commercial risk of business. It also enables the company to reduce the value of its asset (through additional dividends) which can then reduce the value of shares to be offered to employees.  Additionally, it can allow a more efficient sale of the business, as separate from the premises the business will be more affordable for a potential purchaser or alternatively, it enables a substantial tax-free sum to be paid into the pension fund.

Andrew Diver says: “Planning for your pension is important, especially at the moment as the cost-of-living soars and the tendency might be to focus on immediate finances. This is understandable but could leave many people paying the price later on. Instead, it’s a good idea to seek advice as pension planning can throw up many questions, particularly if you are dealing with any of the above situations. Beatons can advise on all of these subjects as well as anything else related to pensions, tax and all accounting queries.”

For more information, please contact info@beatons.co.uk 01473 659777