How To Use A SSAS To Pass On Wealth Tax Efficiently
Forget Annual Allowance. It's Possible For Your Company To Make A Pension Contribution Of Half A Million Pounds Into Your SSAS!
Husband and wife team, Steve and Marie, makes and sells oak furniture. The business has been doing so well in recent years, their sons Paul and Robert have joined the business.
Steve and Marie intend to hand over the business in stages as they gradually retire, replacing their earned income with pension income.
They operate from a rented warehouse. The landlord has made them attractive offer to buy the building.
The bank will lend them most of the money, but the interest rate isn’t that attractive. In any event, they need the balance of the purchase price to support the cashflow of the growing business.
Steve and Marie have a variety of small personal pensions and some preserved employer schemes from before they started their business.
They decide to establish a SSAS for the business. The primary aim is to buy the property using their pension money and over time, to pass the property ownership to their sons.
All four of them join the SSAS. Steve and Marie’s pensions are transferred in, along with smaller sums from personal pensions owned by Paul and Robert.
The SSAS buys the property from the landlord. The rent that was formerly paid to the landlord is now paid to the SSAS. The business gets tax relief on the rent it pays the SSAS.
The rent is received tax free in the SSAS. It’s available to fund the retirement income payments for Steve and Marie.
Being fully flexible, Steve and Marie choose to draw only part of their tax free cash.
They’re each entitled to draw 25 per cent of their part of the SSAS fund. But instead of taking it all in one go, they choose to draw it in stages over the coming years, as this is more tax efficient.
Now that Steve and Marie are drawing income from the SSAS, the business no longer needs to pay their wages. In lieu of this, it makes pension contributions for Paul and Robert.
The assets of a SSAS are held on a common trust basis. This means the members benefit equally from all investment returns from all of the assets.
However, in liquidity terms, the sons’ pension contributions and the rent payable from the business are used to service the drawdown payments for mum and dad.
Paul and Robert gradually increase their scheme entitlement, gaining a larger share of the property as their parents’ interest diminishes as a result of their retirement drawings.
The result is that the value of the property has been passed tax efficiently to the next generation, with the only costs being the administration of recording the allocations within the SSAS.
No Stamp Duty is payable because the SSAS continues to hold the property for the beneficial interest of Paul and Robert.
The use of a single SSAS is more efficient compared with four separate SIPPs, one for each of them.
It’s significantly simpler and more cost effective from an administrative viewpoint.
What's more, it avoids the potential for Stamp Duty becoming due on the transfer of part of the property from one SIPP to another.
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