Enter Your E-mail

Steve Allen of VAT Advisers Ltd offers some useful tips for director shareholders who are considering transferring their company's trading property into a pension fund.

Introduction

It is common practice for trading companies to transfer their commercial property into a pension fund for the shareholder directors. In most cases, the property is rented back to the trading company to generate income for the pension fund. However, the VAT implications of the transfer, and the potential savings and pitfalls involved, are rarely considered.

Establish the VAT Liability of the Property

The first thing to do is to establish the VAT liability of the property being ‘transferred’, as the transfer is effectively a sale for VAT purposes. Remember that if the property is still ‘new’ (i.e., up to three years old), the freehold sale will be compulsorily standard-rated.  If the property is no longer 'new', the freehold sale (or any length of leasehold sale) will be exempt from VAT unless an 'Option to Tax' has been made, which involves submitting a written notification to HMRC that you wish charge VAT on rents or freehold sale.

VAT Implications of The Transfer

If the property is ‘new’, or the Option to Tax has been exercised, the trading company will charge the pension fund VAT on the full selling price of the property. If it is an exempt sale, the trading company may not then be able to recover all the VAT incurred on the costs of the sale. The possible impact of an exempt sale is that if the property cost £250,000 or more plus VAT when acquired, or it has been extended or refurbished at a cost of £250,000 or more plus VAT, you may also have to make an adjustment to any VAT already claimed, under the Capital Goods Scheme (CGS). The rules for the CGS are complicated to say the least, and proper VAT advice should be sought if the property falls within the scheme. Suffice to say that if you do not consider the VAT position fully, the pension fund may be left with a large VAT charge that it cannot recover, or the trading company may have its own input VAT restricted.

Optimising the VAT Position

The good news is that there are ways to minimise any potential costs that are easy to put in place, provided you consider the VAT position at an early stage. The first thing to do is to ensure that you do not end up with a VAT restriction in the trading company. You can do this by making sure that the sale of the property is subject to VAT, so Opt to Tax it, if it is not a 'new' commercial property. As mentioned above, you Opt to Tax by writing to HMRC and giving details of the property you want to opt. 

Having made sure there will be no VAT costs in the company, you then have to look at the pension fund. First of all, you should register it for VAT as a property rental company, and the pension fund should Opt to Tax the property. The pension fund will then be able to recover the VAT on the transfer of the property, and any associated costs. As the pension fund has Opted to Tax the property, it will have to charge VAT on the rents to the tenant trading company. The tenant will be able to recover the VAT on the rents, provided it is VAT registered and ‘fully taxable’ (i.e., it charges VAT on all its sales invoices). As a bonus, if you are able to be flexible with the transfer date, you can also obtain a cash flow advantage by timing the transaction so that the pension fund is able to recover the VAT it is charged on the purchase of the property, before the trading company has to account for it to HMRC. 

What if the Property is Already in the Pension Scheme?

Should you have a pension fund which already owns the property tenanted by your trading company, it is still not too late to improve its VAT position. The pension fund is going to incur costs each year on which VAT is charged (e.g., repairs and maintenance, audit fees etc.). If it is not registered for VAT, it cannot recover the VAT on these costs. The remedy is to register the pension fund for VAT, and to Opt to Tax the property, as this will allow it to recover the VAT on all its ongoing costs – something that could easily amount to a few thousand pounds each year. It must be noted, however, that in these particular cases (i.e., where exempt rents have previously been collected), you have to obtain the formal prior permission of HMRC to 'opt to tax'.