When we think of a pension we usually think of income in retirement or a pot of savings from which to draw in retirement, but in a farming business a pension can be a very useful planning tool.
A pension is simply a tax wrapper; with tax relief on contributions and no tax on the investments held within the pension itself. One type of investment that can be held within a pension is commercial property and for farm owners, this can be your own farmland and buildings. This means that farmland and buildings can be sold to your own pension, providing cash for you individually or for the business, whilst your pension then holds an asset used by your farming business.
So how does this work? To start with the pension fund will need cash to be able to buy any land and buildings and this can come from either:
- Contributions – these can be made personally (including from farm partnership drawings) or from a farming company as employer contributions.
- Transfer of existing pensions – many people accumulate pension pots throughout their lives and these can be transferred to a new pension scheme.
Once the pension scheme owns the property, it can be let back to the farming business and the farm then pays a rent to the pension scheme. The benefit to the business is that the rent payment is tax deductible for the business, but the pension scheme pays no tax on receiving the rental income. The pension scheme can then invest the rent tax efficiently. The asset itself will also grow in value free from tax whilst it is held by the pension scheme and if sold, there will be no Capital Gains Tax to pay.
Let’s look at an example of how this could work in practice…
Two brothers run a farming partnership and a farming company together. The company has accumulated profits that have not been paid out as either salary or dividends, because to do so would mean that the amounts would be subject to income tax. They set up a small self-administered pension scheme (explained below) and the company makes a pension contribution for each brother of £40,000. They both have existing pensions; one has £60,000 in total and the other has £160,000 and these are transferred to the new scheme. They are then able to use the total pot of £300,000 to purchase buildings owned by the farm partnership, resulting in a cash injection into the business. Both brothers are now members of a pension scheme with one owning a one-third share and the other owning a two-thirds share based on their collective contributions and transfers.
There are two types of pension scheme which can facilitate commercial property purchases, these are a Self-Invested Personal Pension (SIPP) and a Small Self-Administered Scheme (SSAS). A SIPP is usually owned by one individual, although family SIPPs are possible and two or more SIPPS can collectively purchase one commercial property.
A SSAS is very well suited to a farming business as it can be thought of as a type of pension partnership. Each member has their own share depending on their contributions and transfers in and each member is also a trustee of the scheme. A SSAS also offers the following features:
- It can borrow up to 50% of the value of its assets to invest further.
- It can loan up to 50% of the value of its assets to its sponsoring employer, which will be the farming company or partnership.
Land and property often make up the majority of assets a farm owner holds. Pensions can also hold a portfolio of investments as well as, or alongside, property. For example, the regular property rental income can be invested in a portfolio of stocks and shares. This provides diversity to property and liquidity. Liquidity is very important as property cannot be sold quickly, whereas other types of investments can be sold in less than two weeks. This can be particularly useful for retiring partners who may wish to take an income from their pension.
Hopefully this gives you a feel for how pensions can work in a business context and that they are not just for retirement planning. If you would like to find out more, or would like to discuss your personal circumstances in more detail, please contact the Financial Planning Team at Churchgates.
