Achieving tax relief when constructing a new building


Since the abolition of Agricultural Buildings Allowances (ABAs) a few years ago, there is no direct tax relief on expenditure incurred when constructing a building.


Steve Woodham, Pensions Manager, Yeovil


Certain elements of a building can qualify for relief, such as integral fixtures like water and heating systems, which qualify for Capital Allowances. Fixed plant and machinery such as milking parlours, cubicles, grain elevators and dryers also qualify for Capital Allowances, but the building itself does not.


At Old Mill we have been working with our clients to establish mechanisms whereby tax relief can be obtained when constructing new buildings. On large projects the resulting tax savings can be very significant and impact in the overall viability of the investment.


An idea that is becoming popular with our corporate clients is to utilise a self-invested company pension scheme to build the building and achieve overall tax efficiency.


How does it work?


nThe company pays money into a Small Self Administered Scheme (SSAS), getting full tax relief on the contributions made.


nThe SSAS can also borrow up to 50% of the value of the fund to top up the funds available to construct the new building.


nThe SSAS purchases the land on which the building is to be built and constructs the shell of the building.


nThe company, as the tenant, then installs any fixed plant and fittings, such as grain elevators and a dryer, as tenant’s improvements.


nCapital Allowances are claimed by the company on the plant installed giving rise to a Corporation Tax saving.


nThe company pays rent to the SSAS for use of the building each year, the rent paid receives a Corporation Tax deduction and as a pension fund, the SSAS does not pay tax on the rental income received.


nThe SSAS can use the rental income to repay debt or simply continue to build a retirement fund for the company directors.


nOverall, tax relief is obtained on all money spent on constructing the building and fixtures.


I do not have a company – can I still achieve the overall objective?


It is possible to use a Self Invested Personal Pension (SIPP) to facilitate a similar scenario for a sole trader or partnership. The tax efficiency is fully available, however, the use of a SIPP is likely to be more costly in terms of pension scheme charges due to pension regulations. A company and SSAS arrangement is usually more attractive overall.


What else should I consider?


nAt the point where the directors wish to retire from the business and access their pension funds, the building will need to be converted into liquid funds. The business could buy the building back from the pension fund • The next generation of directors can establish a further pension fund with which to purchase the building, achieving tax relief on the money paid in and facilitating the older generation to retire with reasonable provisions.


nThe transfer of the land into the pension fund from the company, or directors if held personally, is a chargeable transfer for Capital Gains Tax purposes. There is potential for a Capital Gains Tax charge to be levied on the transfer. • If the company owns the land, Indexation Allowance is likely to cover a large amount of any potential gain significantly reducing or eliminating any tax payable.


• If the directors own the land personally, Capital Gains Tax allowances will be likely to cover a large amount of any potential gain, significantly reducing or eliminating any tax payable.


nWhen setting up the SSAS it is possible to transfer in existing personal pension funds. This provides the opportunity to utilise the value of these funds now, as opposed to waiting to reach pensionable age. Freeing up this capital and having the ability to finance business development is a great benefit to small businesses in the current economic climate, where it continues to be difficult to raise bank funding.


If you have any building projects planned and would like to discuss some of the tax planning ideas available to facilitate tax savings please do not hesitate to contact your usual Old Mill contact and they will be glad to help.


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