Contractors’ Questions: Can our company buy assets for my pension?

Contractor’s Question: If I carry profit over a tax year, that profit gets taxed as corporation tax, so am I right to believe that if I don't make a profit, there is no corporation tax to pay? Then and if come the end of the tax year, I have £100,000 in the company, could I buy something like a gite, in the company name, and use this as a business asset, with the rental for the French holiday home presumably going to the company? I imagine I would have to change the use of the company to a dual use, but would this be the only change that’s required? Later down the line, in say three years, could I transfer these gites into a pension fund? So the gites themselves would become the pension, and could I then backtrack mine, and my wife’s, allowances for pensions (say £50,000 a year each), or is just as easy to put the rental income directly into the pensions?

Expert’s Answer: You are correct in thinking that you will be charged corporation tax on any profits made by your company at the end of the trading year. You retain these profits in the firm, minus any tax charge unfortunately.

Sadly the rules surrounding purchasing property abroad through your company are very complicated and unless your company is registered as a property developer or similar, you are unlikely to be able to directly purchase your Gite using the retained profits. One way around this is to opt for a property-based collective investment, such as a unit trust, but these are highly unlikely to specifically include a bias towards French Gite investments.

As you are thinking that your eventual plan would result in the investment of the rental income from the property into a pension for you and your wife, you may find it more straightforward and more immediately beneficial from a corporation tax perspective to transfer funds directly into a pension this year instead. Your company can invest into a pension on your behalf and offset the contributions against profits, so you can potentially reduce that corporation tax bill to nothing. There are no restrictions on the amount that the company can invest as long as you remain within the annual personal allowance of £50,000.

If you do find that you have £100,000 retained in your business by the end of the tax year then you may be able to use ‘carry forward’ rules to invest this full amount. These rules allow certain individuals to make use of your unused annual allowance from the last three years so that you can invest a further £150,000 this tax year if you haven’t previously invested. Alternatively, you may wish to arrange for the company to fund a pension for your wife instead to help spread the profits among more than one retirement fund, although this may be limited by her role within your company.

If you are generally interested in investing in property then most pensions will have access to commercial property funds. Alternatively, if you wish to invest in a specific office or factory then a Self Invested Personal Pension or Small Self Administered Scheme can be used. This has proved very popular with freelance professionals who may buy premises that they will use themselves, with their company paying rent into their own pension fund as a means of further boosting their future retirement income.

Whichever property related route best suits your needs, you can rest assured that pension investment offers a very tax-efficient method of transferring company profits into personal hands. You can release 25% of the pension fund as a tax-free lump sum as early as age 55 – that’s before having to hang up your keyboard and before you retire, meaning you can probably get your hands on your hard earned profits sooner than you may think.

The expert was Tony Harris, founder and managing director of independent financial advisory ContractorMoney.

Wednesday 31st August 2011