Case study

George and Dennis Gibley have a problem and have approached their financial adviser. The brothers' company has turned in a record year and profits will exceed £150,000 resulting in a corporation tax bill of around £28,500. The brothers know that three months into next year, they will be investing in new plant and machinery necessary to keep them at the top of their market and likely costs will be at least £150,000, but ideally more. 

They could retain their profit from the current year but this would trigger a £28,500 tax liability reducing retained profits to £121,500. Whilst they have a good relationship with their bank, they do not like the costs of arranging borrowing, nor payment of interest to the bank. Nor do they wish to give the security required by the bank to make the advance.

The financial adviser asks about the brother’s current pension provision, and learns that both are members of the company’s executive pension scheme and have allocations of around £70,000 each, but neither have received contributions in the last few years. Both brothers acknowledge that they really do need to recommence funding to their pensions but are concerned that whilst corporate contributions this year would reduce their profit and thus corporation tax bill, they would reduce available investment which would be required next year.

The adviser explains however how they can get, not only contributions back into the company, but also the extra capital they really need to make the investment into new machinery.

The company operates from its own trading premises, which it purchased in 2007. Sadly, this was towards the top of the property market before the 2008/2009 crash, although values have recovered to £250,000, just £10,000 more than they paid for it. They have however fully paid off the mortgage.

The adviser suggests that the company makes a corporate contribution for each brother of £75,000, which would reduce the company's profit to zero and thus save the payment of corporation tax of £28,500. The payment would utilise the individual's current annual allowance plus unused allowances carried forward from previous tax years.

Ideally, the purchase of commercial property would be through a Small Self-Administered Scheme (SSAS) but due to the relatively short time before the company's year end, there is insufficient time to establish a new scheme and be certain of obtaining HMRC registration before which, a contribution cannot be made. The HRMC check and register process can take between 2-3 months.

Instead, the adviser recommends a specialist SSAS practitioner who reviews the EPP's current deed and rules and find that they can be amended to adopt the provisions of a SSAS. As this is an alteration to a scheme, which is already registered, there is no delay and the contribution can then be made into the cash account of the newly converted SSAS.

As the SSAS is acquiring the property from a connected party, it is necessary for the purchase price to be verified by an independent commercial property valuer, who confirms the value at £250,000. The SSAS, which now holds a total of £290,000, sells down some of the funds necessary to augment the new cash contribution and can now acquire the property releasing the purchase price back to the company, which it can use for the investments. It will suffer a small tax bill on the gain in value of the property since its original acquisition.

The SSAS will need to cover SDLT and solicitor/acquisition costs and it will also be necessary for the company to enter into a lease, also at a commercial value set by and independent valuer, which in this case is £20,000. The company managed to save corporation tax by virtue of the pension contribution, which has been effectively returned, and more, enabling the capital investment necessary.

In future years, the company will pay a rent for occupation of the SSAS property of £20,000 which will be a tax-deductible trading expense, which in turn is funding the investment growth of the property within the SSAS. These rental payments received by the SSAS can be added to the excess funds, which remain invested and which are under the management of the adviser.