Pensions have been used for some time now as a means of saving tax. While most of us are familiar with the traditional relief for individuals and companies on pension payments made throughout a tax year there are several other ways in which pensions can be used to save tax including the following:
PENSIONS AND TERMINAL LOSS RELIEF
Where a trade or profession is permanently discontinued and in the twelve months to the date of discontinuance a loss has been sustained (“terminal loss”), the loss may be off set against the trading profits for the three years of assessment prior to the year of cessation provided that relief is not claimed for the loss under any other section.
The amount of the terminal loss is the aggregate of the following:
- the loss sustained in the year of cessation;
- the relevant capital allowances for the year of cessation;
- the loss in the part of the penultimate year of assessment beginning twelve months before the date of cessation;
- the proportion (on a time basis) of the relevant capital allowances for the penultimate year of assessment appropriate to the period mentioned in (c).
The terminal loss, when computed, is set against the taxable profits of the trade for the three preceding years of assessment and is given, as far as possible, against the profits of a later rather than an earlier year.
A trade or profession is deemed to be permanently discontinued where there is a change in ownership. Accordingly, relief for a terminal loss may be claimed in such circumstances.
If we take a situation where a company makes a pension contribution before ceasing to trade and this contribution generates a loss for the company. This loss will be deemed to be a terminal loss and will be available for offset against the profits of the previous three years. This will have the result of an increased pension fund for the director/employee and a CT saving for the company.
PENSIONS AND CGT
The charge to capital gains tax arises on gains accruing on the disposal of assets. If a company is being sold and there are considerable cash reserves in the company and the directors/shareholders are under funded for pensions it may be an idea to use the cash to fund the pension. This will have the effect of reducing the value of the company and consequently the amount of CGT payable.
PENSIONS AND CAT
Business property relief reduces the taxable value of “relevant business property” by 90%. This combined with the 20% rate of CAT means that assets qualifying for business relief would suffer an effective tax rate of 2% after the relevant thresholds have been used up. There are several conditions which must be satisfied in order to claim business property relief, some of which are as follows:
- Business property is defined as follows:
a) Property consisting of a business or an interest in a business;
b) Unquoted shares or securities of a company (whether Irish incorporated or not) subject to certain conditions;
c) Land, buildings, machinery or plant owned by the disponer but used by a company controlled by the disponer or by a partnership in which the disponer was a partner;
d) Quoted shares or securities of a company which were owned by the disponer prior to their becoming quoted. - The business carried on must not consist wholly or mainly of dealing in land, shares, securities or currencies or of making or holding investments.
- The relevant business property must have been owned by the disponer, or by the disponer and his spouse, for at least five years prior to a gift, or for at least two years for an inheritance taken on the disponer’s death.
- Agricultural property qualifies for the relief whether held by a company or an individual, provided all the above conditions are satisfied and that agricultural relief does not apply.
- Business relief will be clawed back if the business property is sold or otherwise disposed of within a six-year period after taking the gift or inheritance.
It should be noted that cash is not a qualifying asset for the purpose of business property relief. In a situation where business property relief is being claimed and there is significant cash in the company it may be beneficial to use that cash to provide an increased pension.
This will not only result in a CAT saving but the additional pension contribution will also generate a CT saving at 12.5% (assuming that it is within the maximum allowable limits).