Two step tax planning

John is a haulage contractor based in Yorkshire and he has built a very successful business based on contracts with many blue chip companies. The company is called Kings Haulage Contractors Ltd. Ten years ago, when he first established the business, John re-mortgaged his home to raise the deposit to purchase a warehouse and a large adjoining yard for £150,000. The mortgage has now been settled. John is now 55 and would like to consider retirement in the next 5 years. His salary is £50,000 per year.

John attends his usual year end meeting with his accountant, Ben, who suggested that he transfers the ownership of the property to the company by debiting the value of the property into the company balance sheet and crediting the director’s loan account. At a value of £200,000, this would result in John being able to draw 4 year’s salary from his director’s loan account with no tax or NI implications (although stamp duty and capital gains tax would need to be considered).

Ben then suggested that, on completion of the transfer of the ownership of the property to the company, and subject to an independent valuation, the property could then be ‘paid’ as an ‘in specie’ employer contribution to a pension scheme known as a SIPP. This would reduce or possibly eradicate the company’s corporation tax liability as Ben was confident that HMRC would regard the payment as being paid ‘wholly and exclusively for the purposes of trade’ (and HMRC would therefore allow the ‘contribution’ to be treated as a tax deductible expense).

Ben went onto explain that the company would pay a commercial rent to the pension scheme and these rental payments would also normally be treated as a tax deductible expense. John’s pension scheme would therefore acquire a cash fund (in addition to the property) which John could invest in a wide range of assets in accordance with HMRC rules. As with all pension schemes, John could take a tax free cash sum of 25% of the fund value from his pension plan at any time from age 55 and use the remainder of the pension fund to provide an immediate income (or he could elect to draw the income at a later date).

John was thrilled as his retirement provision had been playing on his mind. He was also pleased to learn that no further capital gains tax liability would accrue whilst the property was held as an asset of his SIPP and the property would be protected from company creditors.

Important Notes

  • 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.
  • You should seek advice from a professional Financial Adviser who can help you decide whether our products are suitable for you.
  • 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.
  • Past performance is not a guide to future performance.

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