Why did Mr & Mrs Sharma get in touch with Beaufort Financial?
The couple were equal shareholders in an automotive spare parts business. Whilst the business was long-established with a successful track record, very little had been paid into pensions in recent years. Mr & Mrs Sharma got in touch because an opportunity had arisen for the business to purchase the premises it was trading from. They felt that the location was good, they planned to continue trading from the location long-term and therefore wanted to look at how best to purchase the premises. The business was cash-rich, so had the funds to purchase the premises, however, the owners wanted to explore all options. Therefore, we were asked, along with their accountant, to explore the best way that the premises ought to be purchased, be it personally, by the company or via pension funds.
What did Beaufort Financial advise?
Our advice, supported by the accountant, was to purchase the premises through the business owners’ respective pension funds. The existing value of the pension funds were not large enough to purchase the premises outright, so we recommended that the limited company make employer pension contributions on behalf of each shareholding director. Because the company had significant cash reserves this was easily achievable, and we made use of the carry forward rules to mop up unused allowances from the previous three tax years. The pension contributions would be treated as a business expense for the limited company allowing the company to benefit from corporation tax relief. The property now sits in the pension fund and is therefore in a tax advantaged environment. The business will now be paying rent to the pension funds of the business owners, creating a mechanism for taking money from the company in a tax efficient manner and benefiting their pension pots.
How did Mr & Mrs Sharma benefit?
The couple have benefited by securing ownership of their business premises through their pension funds, putting them in control of how long they continue to trade from there. The movement of cash out of the company has resulted in a large reduction in corporation tax, and paying rent to their own pension funds rather than a third party will boost their pension fund values. Furthermore, future growth in the value of the property will be free from capital gains tax, and outside of the estate should the business go bankrupt.
What can we learn?
What may appear to be a straight-forward property purchase using excess cash from a business, can have significant tax implications. For business owners, it is always worth exploring other options for investing in business property, with the help of accountants and financial advisers.
If you’re facing a similar situation to Mr and Mrs Sharma and would like to find out more about how we can help you, get in touch today!