How SIPPs can be used for more than just office buildings
With many farmers and landowners struggling to make ends meet, the case study below demonstrates how it can be possible to use a Self Invested Personal Pension (SIPP) to release funds to invest in a business while at the same time generating retirement income and facilitating succession planning.
William farms over a thousand acres in Kent. His family has been farming for generations and he wants to eventually hand over the farm to his son, Dan, who works with him on the farm. Like many farmers, William has struggled with rising costs combined with falling prices for both livestock and cereal. His wife, Louise, has been working for many years to help make ends meet. Although retirement is not yet an option for them, it is fast becoming an important consideration. They therefore arranged to meet Tony, their financial adviser, to discuss their financial situation and the options open to them.
The SIPP option
Having conducted a full review of their circumstances, Tony went over a few different options for William and his family. One idea in particular stood out to William – a self-invested personal pension with the ability to purchase commercial property. Tony outlined the potential benefits of using SIPPs to purchase part of the farmland in order to free up some cash for William and his wife. He was able to demonstrate to them that by consolidating William’s existing pension policies, totalling around £200,000, into a SIPP he could take greater control over his pension and retirement. Both William and Louise were also pleased to find that after her years at work, Louise had also managed to accrue a £100,000 pension fund made up of protected and non-protected rights.
Tony explained how between them they could purchase some of their farmland through a connected party transaction. Tony explained the detail to the couple: whilst the farmland and the associated commercial buildings could be purchased by the SIPP, the family home and its garden could not; neither could any of the livestock or crops. William asked about his farm machinery, into which he had invested a significant amount of money over the years, and Tony explained that that would not be feasible because it would result in the SIPP incurring significant tax charges.
Tony outlined how, as a couple, they could transfer their existing pension funds into SIPPs, and then use the funds in the SIPPs to buy part of their farmland at market value.
They could use the proceeds from the sale to increase the cash flow of the business and help increase efficiencies on the farm. In addition, Tony explained that the transaction would be classed as a disposal for capital gains tax (CGT) purposes and that stamp duty land tax would be payable by the SIPPs on the purchase price.
William and Louise would enter a tenancy agreement with the SIPP provider, paying a market rent in return for use of the land. The rent paid by William and Louise would be a tax deductible expense of their business and would also generate income for the SIPP free of any tax. At first, William was concerned that he would lose control over the land. However, Tony assured him that, although he would no longer be the legal owner of the land, the SIPP provider would follow their instructions provided that these complied with HMRC rules. The land would be separated from his home and removed from the business and hence if the business was to fail the land would not become available to any creditors.
William still had some doubts over what would happen both to the business and the land when he eventually passed away. Tony explained that it depended on whether or not he had taken any benefits and what expression of wish he left. The assets could be used to provide an income for his wife or passed to his son. There would be a tax charge if William had already taken benefits. A combination of both these options would also be possible. If Louise continued to take an income from the pension the remaining assets could be left to her son on her death, subject to a tax charge.
Retaining control was important to William, and he was reassured on this front. Tony showed them how their financial positions would change, to better suit their current and future needs.
William and Louise both had various pension funds with a number of providers, totalling £300,000.
William and Louise now each have a SIPP, which own farmland with a total value of £300,000. £300,000 cash, less any capital gains tax (CGT), has been released to William and Louise, which they can reinvest in the business or use as they see fit. They pay an agreed market rent to the SIPPs for the land they farm.
Points to consider
Consideration should be given to the costs of both the SIPPs and the associated charges for acquiring and managing the property, even if it is land.
Commercial property is widely considered to be potentially illiquid. Unlike most traded assets it can take time to sell part or all of the asset.
A good, robust succession plan drawn up at the outset can be effective in managing this situation, especially when the property owners are connected, i.e. they are either family or have a common interest in the investment.
To discuss whether this type of planning may be suitable for your business, please contact MHA MacIntyre Hudson Wealth Management team.
It may be applicable beyond office buildings and farmland but is not suitable for residential property.