Member In Specie Contribution
Hilda has been the proprietor of a hairdressing salon for 20 years. The shop is called Audrey’s after her late mother. She has just made the last payment on the mortgage for the building occupied by her salon. The building has been independently valued at £90,000.
Hilda is thinking about retiring in five years’ time but she has not made any pension provision and she doesn’t have any significant cash funds available to invest for her retirement. She has been reading a newspaper article about commercial property investment within a Self Invested Personal Pension plan (SIPP) and she calls her accountant, Sally, to ask her if a SIPP is viable in her circumstances. Sally informs Hilda that, although she doesn’t have any large cash sums to pay in to a pension plan she can in fact still make significant pension contributions by transferring the ownership of the property (ie. the salon) as an ‘in specie’ contribution to a SIPP (in stages) over the following three years.
The ownership of the property would change as follows:
- Year one: 1/3rd SIPP & 2/3rd Hilda
- Year two: 2/3rd SIPP & 1/3rd Hilda
- Year three: 100% SIPP
Under current legislation (as at April 2013), each year’s pension contribution (ie. the £30,000 share of the property) would attract basic rate tax relief. Assuming the basic rate of income tax is 20%, the effective amount invested in the pension plan would be £37,500 (which is below her gross salary of £40,000pa). If the value of the property doesn’t change (and tax rates and rules don’t change), Hilda would effectively make contributions of £112,500 to her pension plan over the three year period (i.e. £37,500 X 3). Hilda may however be liable for capital gains tax on the sale of the property which Sally has yet to calculate (Stamp duty may also be a consideration for larger transactions).
A commercial rent is paid by the salon to Hilda’s SIPP (in the same proportions as the ownership outlined above) but Hilda can offset these payments against her corporation tax bill (as they are classed as a business expense). These rental payments boost the value of Hilda’s retirement fund.
No liability to capital gains tax accrues on the proportion of the property held within the pension plan and the property is protected from company creditors (to the extent that it is owned by the SIPP).
- These notes are based on GPC SIPP Ltd understanding of HMRC rules and regulations at the time of writing (April 2013).
- Tax Rates, Allowances, Reliefs and Rules may change in the future.
- GPC SIPP Ltd is not authorised to provide advice.
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- The value of the investments held within a pension scheme can fall as well as rise and you may get back less than you invested.
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