Derrick Fowler, joint managing director of Dentons Pension Management, reveals how advisers can maximise tax relief for high net worth clients by purchasing commercial property through a flexible SIPP.
With the wealth of information freely available on the internet, and with Retail Distribution Review models kicking in, advisers may be looking for additional ways to demonstrate value when advising their high net worth clients.
The tax reliefs available when contributing to pensions are well known, but the flexibility of a full self-invested personal pension (SIPP) can take tax planning to a whole new level. An enquiry we received towards the end of the tax year is a case in point.
An adviser’s client, a higher rate tax payer, whose income included £30,000 from personal ownership of commercial property, was looking for ways to reduce his income tax bill. The property was valued at £400,000 and he held several money purchase pensions from various sources totalling around £460,000.
Taking tax planning to a whole new level
At first glance, the solution to the problem seems obvious: the adviser can review the existing pensions and, if appropriate, amalgamate into a single SIPP and use transfer proceeds to purchase the property outright from the individual.
The end result being the property ownership transfers to the SIPP, with future capital gains protected in the tax exempt environment, as are future rental receipts. The SIPP has a secure (subject to the continued tenancy) future investment. The client reduces his income by £30,000 saving £15,000 of income tax and receives cash proceeds which, with the help of the adviser, can be reinvested in investments yielding a capital gain which is more efficient than income gain.
The problem arose when it became apparent from the arm’s length valuation of the property that, in the transfer from the client to his SIPP, a capital gain of more than £20,000 would occur, creating a capital gains tax charge, which took the shine off the initial proposal. In addition, while the client’s income would reduce (being towards the end of the tax year) and only one month’s rental income would have been diverted to the SIPP, his income was still well in excess of the £150,000 tax threshold. It is here that the creative use of a flexible SIPP can assist.
Not all, but several SIPP providers will permit the joint ownership of a commercial property. In fact, with the current maximum contribution levels and borrowing restricted to 50% of the net SIPP assets, acquisition of property between multiple parties or in a staggered manner is becoming increasingly common. In this instance, the solution was complex, but highly efficient.
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