Q: I hold the business premises for my family trading company through my pension. With all the forthcoming changes to inheritance tax, should I continue to do so?
A: Self-invested personal pensions (Sipps) and small self-administered schemes (SASSs) can hold a wider range of assets than other forms of pensions. For investment reasons, it has historically been common for such schemes to acquire assets that would otherwise qualify for inheritance tax (IHT) business relief or agricultural relief.
Holding the business premises in a pension is common as selling the property to the pension generates cash to develop the business. Plus, rent from the business builds up in the pension fund tax-free. In addition, business premises you own personally and let to your trading company only qualify for IHT business relief at 50 per cent (and only if you control the company through your personal shareholdings) — so 100 per cent IHT exemption through a pension wrapper was attractive.
Of course, other business assets held in a pension might also include shares in a trading company, farmland and shares listed on the AIM market. SASSs, being occupational schemes, can hold shares in a sponsoring company valued at up to 5 per cent of scheme assets, with an overall maximum of 20 per cent where there are multiple employers (there is no such restriction for Sipps).
However, a radical shake-up is coming — the IHT rules for both business/agricultural relief and pensions are changing.
From April 6 next year, business relief and agricultural relief will both be restricted to a maximum of 100 per cent relief for the first £1 million of qualifying assets and 50 per cent of assets thereafter (but, as above, relief on premises let to your trading company is already restricted to 50 per cent). From April 6, 2027, IHT will also be due on pensions. The draft legislation confirms that business relief and agricultural relief will simply not apply to assets held by pensions.
Therefore, you should explore the possibility of extracting business property from your pension so that, if it qualifies for 50 per cent relief and you die holding it, the resulting IHT will be reduced.
Having the business property in your name also opens additional planning opportunities — for example, making lifetime gifts. There is speculation that the government is considering changes to IHT gift reliefs in the autumn budget on November 26. This would reduce the opportunity for individuals to make tax-free lifetime gifts and thereby reduce the value of their estate and the IHT payable on their death.
Extracting assets from a pension needs careful consideration and professional advice — particularly around ownership structure, valuation and other potential charges. Often, the simplest option is for the business owner or the trading entity to buy the assets back from the fund, but it is important that market value is paid to prevent an “unauthorised payment charge”.
With the forthcoming changes to IHT, business owners should review their wills and succession plans, ensuring that pensions are included in that review.
Paul Townson is a tax partner at the professional services firm, BDO