Richard Mattison explains how a SSAS can purchase commercial property subject to VAT
Alan and Pete operated a business installing cats-eyes in roads and motorways. The company owned its property which it used both for storage of stock and equipment and as an office.
It let part of the building to a friend called Steve who ran a local delivery firm. He was paying them rent of £600 per month on an informal basis with no lease or tenancy. The property was originally purchased by the company five years ago and was subject to VAT which the company paid and then reclaimed through their next VAT return.
Alan and Pete wanted to raise some capital in the business to purchase new stock and transport. The company did have £40,000 as cash available but needed approximately £120,000. Their IFA suggested they establish a small self-administered scheme (SSAS) as they both had existing pension schemes they could use.
This is what they did:
- The company established a SSAS and transferred-in the existing pensions valued at £175,000.
- The company also paid a contribution of £40,000 to the SSAS (£20,000 each for Alan and Pete) which qualified as an expense to reduce their corporation tax bill.
- The property was valued by a RICS-qualified surveyor at £200,000. With VAT on this of 20%, the purchase price would have been £240,000 plus stamp duty of £1,800 and fees estimated at £1,500 requiring a sum of £243,300 to complete the purchase. This was more than the company or pension scheme had available and left no headroom for unanticipated expenses.
- However, the ace up their sleeve proved to be Steve. By persuading him to enter into a short-term tenancy agreement for £500 per month (plus VAT i.e. £600 per month in total – which he was already paying), the property qualified as a transfer of a going concern.
- By registering the SSAS for VAT and opting to tax the property, the purchase was treated as a transfer of a going concern. This meant the purchase price did not have to include VAT. The total payable was therefore £200,000 plus stamp duty of £1,000 and costs of £1,500: a total of £202,500. This was well within the amount available in the pension fund.
- Following the purchase, a lease between the pension scheme and the company was completed for £14,000 p.a. plus VAT (as dictated by the RICS survey). Steve also had to re-direct his rent to the SSAS.
The outcome of this arrangement was that Alan and Pete were able to generate £160,000 of capital in the business by selling the property to the SSAS but avoid the need for the SSAS to pay £40,000 of VAT.
The company benefitted from a reduced corporation tax bill of £7,600 and the stamp duty charge was reduced by £800.
The SSAS does charge VAT on the rent but as their company is VAT-registered this can be reclaimed.
The SSAS generates rental income of £20,000 p.a. which accumulates tax-free and will contribute to Alan and Pete’s comfortable retirement.
Richard Mattison is director at SSAS provider Whitehall Group
