SSAS Pension: Does a SSAS Reduce Capital Gains Tax (CGT)? Illustrated
In this article, we will discuss SSAS pensions and whether a SSAS can reduce capital gains tax.
What is Capital Gains Tax?
Capital gains tax (CGT) is the tax you pay on the profits you make on the sale of an asset. So, for example, if you buy a second home and that home increases in value, the increase is potentially liable to capital gains tax.
It’s the same thing in business. If the business buys an asset, such as a commercial property, and that property increases in value and is subsequently sold, the gain over the original purchase price is subsequent to capital gains tax.
So, you can pay capital gains tax on a number of items.
Does SSAS Help with Capital Gains Tax?
Just as a very quick recap; SSAS stands for Small Self-administered scheme and it has to be set up by an actively trading Limited Company. So, let’s have a look at what this looks like if you were to move assets into a SSAS:
We have the Limited Company and, for the sake of this example, this is a husband and wife Limited Company - both the husband and wife are directors. The Limited Company is the sponsoring employer and sets up the SSAS.
The husband and wife are both members of the SSAS and the Limited Company is allowed to make contributions on their behalf. These contributions will help reduce the corporation tax payable by the Company because the contributions count as a tax deductible expense, providing they meet the whole and exclusively for the purpose of the business rules.
Owning Commercial Property Inside a SSAS
Now, let’s say the Limited Company in our example owns a commercial property. The commercial property is on the balance sheet of the Company. If that property remains on the balance sheet of the Company, and it increases in value from the date it was purchased, then the gain on sale will potentially be liable to capital gains tax inside the Company.
So, it makes sense to move that asset off the balance sheet and into the SSAS.
Discover the benefits of moving commercial property into SSAS.
Let’s Take a Look at the Numbers
So, if we assume the commercial property is worth £300,000 and for the purposes of this example, there is no debt on the property, if the Company were to make contributions for the directors, putting in £150,000 for each director as a corporate contribution, this would give a healthy corporation tax deduction for the Company.
So, the money has gone out of the Company, straight into the pension scheme and received a corporation tax deduction. So, on a £300,000 contribution to the pension, and assuming the Company pays corporation tax at a rate of 25%, they will receive a £75,000 reduction in their potential corporation tax bill, which is very attractive.
How much corporation tax can I save?
Purchasing the Commercial Property into the SSAS
The SSAS is going to buy the property off the Company. As you would expect, it goes through a sales process. We have the property independently valued by an independent charter surveyor and a lawyer, who will convey the property to the SSAS.
When the property is moved off the Company balance sheet and into the SSAS, it is owned by the SSAS. If, during this process, the property has increased in value, there could be a disposal for capital gains tax purposes in the Company. So, this is one thing you need to check with your accountant.
So, we’re going to buy the property off the Limited Company with £300,000. The property ends up inside the SSAS and the £300,000 flows back into the Limited Company. So, effectively you’ve put £300,000 into the SSAS only to get it back a few weeks later upon the sale of the property. So, it has effectively become a free transaction. In fact, better than that because you’ve managed to save £75,000 tax in the process.
How Does Capital Gains Tax Work?
Once the property is inside the SSAS, then the SSAS is statutorily exempt from capital gains tax. It simply does not apply. So, you’ve put the property in at the value of £300,000 and if that property rises in value to £500,000 in the years to come, and the SSAS sells that property, the funds will come back into the SSAS. However there is no capital gains tax on the increased value over the original purchase price.
So, not only have you saved corporation tax on the way through but you’ve also eliminated any future capital gains tax as well. It’s a win win all round.
Get in Touch with Us
We’d love to hear from you. If your business assets are potentially liable to capital gains tax, you could be saving thousands of pounds every year. Book a call with us to discuss opening a SSAS and let’s start saving.
