Enter Your E-mail

Steve Allen of VAT Advisers Ltd outlines some pitfalls and planning points for company owners transferring commercial property into a pension scheme.

Introduction

For some time now, it has been popular for companies to transfer their commercial property into a pension fund for the owner-directors.  However, in many cases, nobody considers the VAT aspects of the transfer, or what savings can be made.

In most cases, the properties are transferred into the pension fund, and then rented back to the company, thereby generating an income stream to the pension fund. However, the VAT aspects of the transfer and the potential savings and pitfalls are rarely considered.

Potential pitfalls

You first have to decide what VAT liability applies to the property that is being ‘transferred’, as it is, in fact, a sale. Don’t forget that if the property is ‘new’ (i.e., less than three years old), the sale will be compulsorily standard-rated. If the property is not new, it will be exempt from VAT unless you have exercised the option to tax (i.e., notified HMRC that you wish to charge VAT on rents or the freehold sale). If the property is new, or the option to tax has been exercised, the pension fund is going to be charged VAT on the full selling price of the property. If it is an exempt sale, the company may not be able to recover all the VAT on the related costs of the sale. 

If the property cost the company more than £250,000 plus VAT to buy, or if it has built an extension or refurbished the building at a cost of more than £250,000 plus VAT, an adjustment may be required to the amount of input VAT already claimed under the ‘Capital Goods Scheme’. It would be wise in such circumstances to get some professional VAT advice prior to transfer, because if the VAT position is not considered fully, the pension fund may be left with a large VAT bill that it cannot recover, or the company may have its own input VAT restricted.

Potential savings

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.

Tip 1 

Firstly, make sure that you do not have a VAT restriction in the company. You can do this by making sure the sale of the property is subject to VAT, so opt to tax if it is not a ’new’ commercial property. You can opt to tax by writing to HMRC and giving details of the property you want to opt.

Tip 2 

Now you have made sure you have no VAT costs in the company, you will have to look at the pension fund. First of all, you should register it for VAT as a property rental company, and opt to tax the properties. The pension fund will then be able to recover the VAT on the purchase of the property, and any associated costs.

Remember 

Now that the pension fund has opted to tax the property, it will have to charge VAT on the rents to its tenant(s). The tenant(s) will be able to recover the VAT on the rents, provided they are VAT registered and ‘fully taxable’ (i.e., VAT is charged on all their sales invoices).

Tip 3 

If you are careful, you can also obtain a cashflow advantage by timing the company’s invoice in a way that enables the pension fund to recover the input VAT charged on the purchase of the property before the company has to account for the output VAT to HMRC. 

Existing pension funds

If you already have a pension fund that owns the properties the company trades from, it is not too late to improve its VAT position. The pension fund is going to incur costs every year on which VAT is charged (e.g., repairs and maintenance, audit etc.).  If it is not registered for VAT it cannot recover the VAT. The remedy is to register the pension fund for VAT and opt to tax the property, as this would allow it to recover the VAT on all its ongoing costs – something that could easily amount to a few thousand pounds each year!

If you have a non-VAT registered pension fund which is about to acquire the company’s trading premises (or indeed already owns it), please contact us to discuss the issues in this article.

The above article is taken from VAT Voice, a bi-monthly publication. To subscribe to VAT Voice, visit TaxationWeb's Tax Bookshop VAT Voice.