For anyone who owns or is considering acquiring trading premises or any commercial property, utilizing a Small Self-Administered Scheme (SSAS) can be a highly tax-efficient strategy. . Many business owners either hold their commercial property personally or within their company, but both approaches have significant drawbacks. Holding property within a trading company exposes the asset to corporate risks and incurs additional taxes when the property is sold or profits are extracted. On the other hand, holding property personally may alleviate some risks but often leads to higher income tax on rental income.
Use SSAS for Tax Efficiency by Avoiding Holding Property in a Trading Company
Owning property within a trading company can be problematic for two main reasons:
- Tax Efficiency: When the company sells the property, it must pay corporation tax on any capital gains. If the profits are then distributed as dividends, shareholders are also liable for income tax, leading to double taxation. This significantly reduces the overall financial benefit of owning the property within the company.
- Corporate Risk: Property held within a company is at risk from any legal or financial challenges the company may face. In the event of business difficulties, this valuable asset could be exposed to claims from creditors, putting it at risk.
Use SSAS for tax Efficiency Alternative
A more tax-efficient and secure alternative is to hold your trading premises or any commercial property through a SSAS. SSAS is particularly well-suited for owners of private companies, offering more control and flexibility compared to a Self-Invested Personal Pension (SIPP), which requires an independent trustee. In contrast, SSAS trustees are typically the company’s directors, allowing them to manage the scheme’s assets directly.
Key Benefits of SSAS:
- Tax-Free Contributions: Companies can contribute to a SSAS, with contributions qualifying for corporation tax relief. The current annual pension allowance is £60,000 per working director (as of the 2024/2025 tax year). Additionally, unused allowances from the previous three years can be carried forward, potentially allowing contributions of up to £180,000 per director, resulting in significant corporation tax savings.
- Tax-Free Rental Income: If the property is leased back to the company, the rent paid to the SSAS is entirely tax-free.
- Tax-Free Capital Gains: Any capital gains from the eventual sale of the property within the SSAS are also tax-free, making this a highly efficient way to manage property assets.
- Tax-Free Lump Sum and Flexible Drawdown: Upon retirement, beneficiaries can extract up to 25% of the pension fund as a tax-free lump sum. The remaining balance can be drawn down as income, with the new pension rules introduced in 2015 allowing for greater flexibility in how much can be withdrawn.
If your company currently holds commercial property, transferring it into a SSAS can yield substantial tax benefits. For instance, if the property is valued at £300,000, transferring it in specie to the SSAS could allow the company to claim full tax relief on the value of the property.
With a corporation tax rate of 19%, this could result in a tax saving of £57,000. Additionally, the rental income generated by leasing the property back to the company would accumulate within the SSAS free from income tax, and any capital gains on the property’s value would be tax-free. Imagine a manufacturing business that owns its trading premises, valued at £400,000. If the property is held within the company, and the directors decide to sell it in the future, they would face corporation tax on the capital gain and income tax on any dividends distributed.
Instead, by transferring the property into a SSAS, the company could avoid these taxes, enjoy tax-free rental income, and ultimately provide a more secure and tax-efficient retirement benefit for the directors
Utilizing a Small Self-Administered Scheme (SSAS) for commercial property can offer significant tax savings and asset protection for business owners. By transferring property into a SSAS, you can benefit from tax-free rental income, capital gains relief, and corporation tax savings while protecting the property from corporate risks. As a long-term tax strategy, SSAS also provides a flexible retirement solution, making it a powerful tool for any business owner who holds or plans to acquire commercial property.
Frequently Asked Questions (FAQ) on how to use SSAS for Tax Efficiency in the UK
1. What is a SSAS (Small Self-Administered Scheme)?
A Small Self-Administered Scheme (SSAS) is a type of UK pension scheme designed for business owners and company directors. It allows greater flexibility in investment choices, including the ability to invest in commercial property and loan funds back to the sponsoring business.
2. How does a SSAS provide tax efficiency?
SSAS offers multiple tax advantages, including:
- Corporation tax relief on employer pension contributions.
- Exemption from capital gains tax on asset growth within the SSAS.
- Tax-free rental income from commercial property owned by the SSAS.
- 25% tax-free lump sum withdrawal upon retirement.
3. Can a SSAS be used to invest in property?
Yes, a SSAS can invest in commercial property, which can then be leased back to the sponsoring company at market rates. However, SSAS cannot invest in residential property unless through specific indirect investment routes, such as a Real Estate Investment Trust (REIT).
4. Can I use SSAS funds to buy property outright?
Yes, SSAS funds can be used to purchase commercial property outright or in combination with a mortgage. The property must be used for business purposes and rented out at a market rate.
5. What are the benefits of owning property through a SSAS?
- Rental income is received tax-free within the SSAS.
- No capital gains tax on property appreciation.
- The business can pay rent to the SSAS, which serves as a pension contribution.
- Asset protection from creditors.
6. Can I take out a loan from my SSAS?
Yes, a SSAS can lend up to 50% of its net assets back to the sponsoring company under strict HMRC guidelines. The loan must be secured, at a commercial interest rate, and repaid within five years.
7. Are there restrictions on SSAS property investments?
Yes, the main restrictions include:
- Only commercial properties can be purchased directly.
- Residential properties are not permitted unless through specific investment structures.
- Transactions must be at arm’s length to avoid tax penalties.
8. What happens to the SSAS upon retirement?
Upon retirement (from age 55), members can take up to 25% of their pension pot tax-free. The remainder can be drawn as income, subject to income tax, or left invested within the SSAS.
9. How is a SSAS different from a SIPP?
While both SSAS and SIPP (Self-Invested Personal Pension) offer investment flexibility, SSAS is exclusive to company owners and can provide business loan facilities, whereas a SIPP is available to individuals and does not permit lending to a company.
10. Is a SSAS regulated by the FCA?
No, SSAS is regulated by HMRC but not by the Financial Conduct Authority (FCA). This means it requires careful management to ensure compliance with pension regulations.
11. How do I set up a SSAS?
A SSAS is set up through a professional pension administrator or SSAS provider. The process involves:
- Establishing the scheme with HMRC approval.
- Appointing trustees (often company directors and business owners).
- Defining investment strategy and contributions.
12. What are the risks of using SSAS for property investment?
- Liquidity risk: Property assets are illiquid compared to other investments.
- Compliance risk: Breaching HMRC rules can lead to heavy tax penalties.
- Market risk: Property values can fluctuate.
13. Can multiple business partners use the same SSAS?
Yes, a SSAS can have multiple members (usually up to 11), allowing business partners or key employees to contribute and benefit from the scheme.
14. What happens to a SSAS when a member dies?
Upon death, the SSAS assets can be passed to beneficiaries, often free from inheritance tax, making it a tax-efficient way to transfer wealth.
15. Is professional advice necessary when setting up a SSAS?
Yes, due to the complexity and regulatory requirements of SSAS, it is advisable to seek guidance from pension specialists, financial advisors, or tax professionals.
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