Andrew had run a very successful business for several years. The business had generated a lot of profit, some of which had been drawn through salary and dividends, but most of which had been retained in the company accounts. The Corporation Tax bill had crept up in the last few years and Andrew wanted to know if he had any options to deal with this, which he hadn’t considered before.
We often come across owner-managers of businesses in this position – they have been very focused on starting and growing their company and take a while to start to think about dealing with issues like profit extraction.
We also explored Andrew’s personal goals outside the business – to enjoy working on the business for the next fifteen years, then exit on his terms, without being reliant on being able to realise any sale proceeds, since he didn’t think that could necessarily be relied on. We agreed that there was a need to begin the process of accumulating wealth outside the business and to plan more strategically for the exit phase.
The business had met its basic auto-enrollment obligations for staff pensions, but hadn't explored pension options for senior executives and owners. A first action was to work closely with the company's FD and accountant to redesign the owners' remuneration packages to make sure they made the most of their pension allowances, including carry forward from previous tax years, which would otherwise have been lost.
This was highly tax-efficient for the business, being tax deductible against Corporation Tax, and for Andrew, as the contributions were not subject to income tax. Importantly, building up pension funds allowed Andrew to start to feel like he was diversifying his plans away from the business, and building up wealth outside it, to give himself more flexibility in the future.
Once we'd started to build up significant value in the pension, we explored the option of using pension funds to buy the property which the business operated from into the pension, as the landlords had made the premises available to purchase.
In effect, the pension was able to buy the property, using cash held in it plus limited borrowing. The business now pays rent to the pension, which it receives free of tax, as well as the pension contributions Andrew still makes each year from company profits. Any future growth in the value of the property will also be owned by the pension, and there will be no Capital Gains Tax on the sale of the property, since the pension wrapper is CGT exempt.
This approach is not for everyone. Holding a commercial property in a pension has pros and cons compared with other investment types, and specific risk factors. It maintains a link between the pension holder and the business while it occupies the property, which they may not want. Commercial property has some specific risks that other asset types don't, for example needing maintenance, and being generally illiquid. But for Andrew, alongside the other planning we put in place, it was a great way to supercharge his pension funding, to speed up the transfer of value from the business to his family, and to get the business’s commercial rent working for him not his landlord.
Your capital is at risk. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
