22.09.08 SELLING BUSINESS PROPERTY INTO PENSION AN OPTION TO CONSIDER

It is undoubtedly a difficult time for the commercial property sector.

We are in a credit crunch, one of the effects of which is to depress the value of this particular asset classs.

In addition, we have a new capital gains tax (CGT) regime for individuals, which came into force in April and, for most, subject gains to a flat rate of CGT at 18%.

If you own a business property with no sentimental attachment - it serves its purpose and you do not need to pass it on to the next generation of your family - there is an option worth considering.

Selling the business property into your self-invested personal pension (Sipp) offers a way of saving a considerable amount of income tax.

The first step would be to have the commercial property valued, in its present state.

Work out the costs, which will roughly be the purchase price plus any improvement expenditure you have incurred.

Next, deduct these costs from the valuation, then multiply the difference by 18%.

This number will be the CGT payable on the gain.

For a sale now, CGT would be payable on January 31, 2010.

The next stage is transferring the property to a Sipp. However, there are annual restrictions on the amount you are able to invest. Up to 100% of income can be paid in the currently tax year which is capped at £235,000, per person. If you go over this limit, conduct the transaction over two (or more) years or, if you are a married couple in business together, it is advisable to set up two Sipps (one each) and put half into each Sipp.

The effect of transfering the property into the Sipp is to treat it as a pension payment receiving 40% income tax relief if you are a higher rate taxpayer.

Now that you have transferred the property to the Sipp, it becomes a landlord. The business occupying the property has to pay rent, which is tax deductible, however, the Sipp, because it is a pension scheme, receives all rent tax free.

You should remember that stamp duty land tax will be payable on the transfer to the Sipp if it is more than £150,000 in value.

If the property is relatively new, VAT will come into play and the Sipp can be registered for VAT and charge VAT on its rents. You can also borrow up to 50% of the Sipp value, allowing you to buy more property.

Publication: Press and Journal

Author: Ian Williams