Stephen McPhillips delves into a case study featuring intellectual property and pension planning
Kate and Alan run a limited company that operates successfully in the care sector. They have taken it from a start-up operation to a profitable business over the course of the past ten years and their company has been able to offer franchises to other businesses who pay a licence fee for the franchise.
These provide a reliable stream of income for the limited company and add to its continuing profitability.
Indeed, the success of the franchising operation is such that the company’s brand and registered trademark are very strong in the marketplace in which it operates.
So, what’s the problem?
At one of their regular review meetings with James, their financial adviser, Kate and Alan explain that the success of their business, whilst very pleasing, is meaning that large amounts of corporation tax are being paid each year by their limited company and that, ideally, they would like a large injection of cash into the business to fund a national advertising campaign.
They further explain that such a campaign would enable the business to reach a wider audience of potential franchisees, thereby enabling further expansion.
James is conscious of the fact that Kate and Alan have had maximum pension contributions paid into their existing small self-administered scheme (SSAS) in recent years and therefore there is limited scope for pension contributions to be utilised to reduce the company’s corporation tax bill.
Finding a solution
James explains that a registered trademark can be considered as “intellectual property” (IP) and, consequently, it can have a value of some sort. James further explains that IP refers to “creations of the mind” and also includes things like patents, software and designs. James goes on to point out that, subject to a professional valuation of the trademark being obtained, it may be possible for the SSAS trustees to buy it from the limited company.
Intrigued, Kate and Alan, ask James for further information on how this might work in practice for them and how it might benefit them specifically as opposed to, say, a SSAS loan to their company (a facility they had used in the past).
Meeting the clients’ requirements
James explains that, whilst a SSAS loan to their company would provide a cash injection for the advertising campaign, the maximum loan is limited to 50% of the net asset value of the SSAS and that a First Legal Charge over a suitable asset would need to be taken by the SSAS trustees to secure the lending. By contrast, neither of these is required where the SSAS acquires IP and, when the SSAS trustees buy the IP from the limited company, a capital sum is received by the company and it never has to repay it.
James also explains that, subject to the professional valuation, the licence may provide a better return to the SSAS than a commercial rate of loan interest would, meaning that the SSAS fund value would grow more quickly than through receiving loan interest payments.
Finally, James is delighted to stress that the licence payments should be a business expense for the limited company (reducing its Corporation Tax liability) and these will be received tax-free into the SSAS bank account. In addition, on eventual disposal by the SSAS trustees, any capital gains would be tax-free. In the fullness of time, hopefully the business expansion (funded by the cash received from the sale of the IP to the SSAS trustees) creates more demand for licences, which in turn may enable the SSAS trustees to charge a greater licence fee (subject to a further professional valuation).
The 'small print'
James stresses that there are various factors to be taken into account with such an investment, not least of which being that it can be a complex exercise and it can be very expensive to obtain a professional valuation of the trademark (and the annual licensing fee) from an ISO 10668 company.
James also stresses that the professional trustee to the SSAS would need to carry out robust due diligence on the proposed investment to determine acceptability in principle and that, if accepted, a solicitor would need to be appointed to legally transfer the trademark from the limited company to the SSAS trustees and to produce a licensing agreement between the parties.
Further valuations would be required in future, such as for benefit crystallisation events and so on.
Stephen McPhillips is technical sales director at Dentons Pension Management