From A-day In-specie contributions have been available. They can offer individuals and companies a way to significantly increase pension funds whilst not having to find liquid cash. Commercial property can be used to make contributions.

Basic rules apply;

If the property is owned by the company the contribution will be an “Employer Contribution” If the property is owned by an individual then the contribution will be a “Personal Contribution”
If the in-specie contribution comes from the company then they will receive corporation tax relief as they would on a normal “Employer Contribution”.

If the in-specie contribution comes from the individual then the amount of the property that can moved into the fund, giving full tax relief, is a net amount at basic rate against the individual’s income. Tax relief of 20% currently, is then claimed back into the pension and if the individual is a higher rate tax payer then the additional 20% is claimed back via their personal tax return

In-specie Case Study

•         Property valuation £ 300,000
•         Earned income of £ 125,000 p.a. for 3 years
•         Move net contribution of property value into SIPP £ 100,000 p.a. for 3 Years
•         Tax relief £ 25,000 p.a. for 3 years

RESULT

After three years;

•         Full property value in SIPP                £ 300,000  •         Cash fund from tax relief                    £   75,000
•         Rent 6% will have gone in                 £   36,000
•         Pension fund                                      £ 411,000
•         TFC available of 25%  equals           £  102,750
•         Rental income of £18,000 p.a. can become pension

If an individual contributes an amount equal to their income it is worth pointing out that they will be a nil tax payer as they get full tax relief into their pension. This should be considered when there is a need to increase the personal income significantly to allow larger amounts of the property into the pension.

There is a move in the market to show that this option can work very well for groups of individual’s or a number of directors. There has been a significant increase in this type of contribution during the first 6 months of this year.

It if worth bearing in mind that once the in-specie contribution has been made it does create a pension fund that can be used to borrow against and we will look at this in more detail moving forward.