Have you considered using your business as a retirement vehicle?
Whether planning to sell your business to a third party or gifting it to the next generation, devising a structured plan long before exit can reap benefits now as well as later. New pension freedoms mean a pension pot can not only benefit you, but also your family and your business. Should you be considering using your business to retire?
Pay into a pension pot before gifting or selling your business
Paying into a pension can be very tax efficient, personal and company contributions can attract tax relief. There’s no tax on you, provided contributions are within Annual Allowances. It is possible to carry forward unused allowances from previous years but careful planning is needed not to go over the limits, therefore it is advisable to pay in every year rather than wait until your exit approaches.
Benefit to you
Aim to build £1m in a pension. It’s not necessary to “retire” to draw on the pension pot, it can be drawn from age 55, 25% can normally be taken tax-free and benefits accessed flexibly. This will be incredibly useful if your
income drops after gifting the business to the next generation or the sale proceeds are less than needed for a comfortable retirement.
A pension pot can save inheritance tax
On death, a pension pot can be left to whoever you wish, such as a surviving spouse/partner, then to future generations – potentially all tax-free. Generally, no tax is payable when death occurs before age 75. If death occurs after 75, the recipient will be subject to income tax, but with careful planning, tax can be mitigated. Be aware, however, there are limits on the amount that can be passed on tax-free and not all pension plans offer the freedoms. Furthermore, you should ensure that you correctly document to whom you wish to pass the pension pot to, otherwise, the pension wrapper will fall away wasting all the careful planning.
In short, compared to holding £1m of capital in your own name, having £1m in a pension pot on death potentially saves up to £400,000 in inheritance tax.
Have your cake and eat it? Potential to provide company finance.
Using a special type of pension means the business also benefits without diverting cash flow away from growth plans.
How it works
A limited company can set up pension under a special trust for the directors of the company, they become member trustees. The pension offers greater flexibility than traditional personal pensions and it can invest
in a much broader range of investments, notably commercial property and land. Directors can pool their pensions to generate one large fund and employer contributions are normally fully deductible against company profits.
- The pension fund can purchase commercial property and lease it back to the company. The company pays rent to the pension fund, with the rent paid to be tax deductible. This can also be helpful where a director is
restricted on his or her contribution level.
- If the property is already owned by a director or the company, it could be sold to the pension scheme, resulting in valuable cash flow.
- The Trustees can borrow to buy the property up to a maximum of 50% of the net value of the pension, e.g. if a pension fund was worth £300,000, maximum borrowing is £150,000 allowing a purchase of a
commercial property of £450,000.
- The pension fund can invest back into your company through secured loans, providing 5 key requirements are met.
- The new tax treatment of death benefits now means that commercial property held in a pension does not have to be sold on death. The pension wrapper and its assets can be retained for future generations.
You can, therefore, put in place the ultimate tax planning wrapper. Fund your retirement, mitigate inheritance tax and provide business finance! Please do not hesitate to contact me for a further discussion.