How to turn your pension fund into cash for your business

Offering a tax incentive when raising corporate finance can be a decision-making ‘tipping point’ for investors if it cuts the cost of investment.  Since the Chancellor’s statement in the Budget allowing anyone over the age of 55 to access their pension fund in its entirety, subject to a tax charge, it has, in certain situations, opened up the opportunity of using pension funds as a source of finance for businesses.

Money within pension funds can be unlocked by the sale of assets to the fund from a business, for example the intellectual property rights of a business.  The business benefits from the cash received on the sale of the asset  and the pension fund benefits from income from the business arising from the use of those rights into the future.

Remember that pension contributions for super higher rate tax payers can still attract tax relief at 45%.  Any growth in the investment on sale within the pension fund will be tax free and under the current rules the beneficiaries of the fund can at some point still draw 25% of the value of the fund tax free.  In addition, the assets within a pension fund up to a certain point can still sit outside of your chargeable estate for inheritance tax.

As referred to in a previous article, the Seed Enterprise Investment Scheme (SEIS) offers generous tax relief against income tax of 50% and with the Enterprise Investment Scheme (EIS) offering income tax relief of 30% , finally (subject to minimum investment periods) the sale of the investment can be capital gains tax free.  There is also with both schemes the opportunity of deferring capital gains, by reinvesting the proceeds into the investment.  Subject to minimum periods of ownership, these will be outside of your chargeable estate for inheritance tax.

Although the raising of corporate finance often focuses on private individuals as a source, it is often forgotten that companies also invest in other businesses.  The ‘substantial shareholding exemption’ rules were introduced a few years ago to encourage investment in other companies.  If a company holds at least 10% of the share capital of another company, it will get relief from tax on the profit arising from the sale of that investment.

As with any of the points raised within this article, the rules relating to pension funds, SEIS, EIS or the substantial shareholding exemption rules are complicated and professional advice should be taken.  Should you have any questions regarding these issues, please do not hesitate to contact Andrew Rand on 01223 461044 or e-mail andrew.rand@stanesrand.co.uk.

 
As featured in Cambridge News Corporate Finance Supplement, 29 July 2014.