Funding pension property purchases

A recent case has made clear that when a property is put into a pension, it should not be simply contributed to the pension (despite the guidance in HMRC’s manuals which sets out a method of creating an obligation which is subsequently satisfied by the property transfer). In order to secure the corporation tax deduction when moving a property into a pension, businesses should now ensure that the pension has adequate funds to buy the property. The purchase has to be at market value and should not normally include deferred payment terms (however a business pension can make loans back to the sponsoring employer of up to 50% of the fund’s assets).

Where the company does not have sufficient cash available to make the contribution, it is possible to enter into short term borrowing which allows the company to make the contribution, sell the property and then repay the lender.

Whenever a large pension contribution like this is made, it is important to bear in mind the possibility of the corporation tax relief being spread over 2 - 3 years if the amount of the contribution is more than £500k greater than that made in the previous year. There are several conditions which sit around the pension relief spreading rules and this is an area which we often advise on to help companies and groups take advantage of the tax relief as early as possible.