SIPPs: The smarter way to own land?

Self-invested personal pensions (SIPP’s) have long been able to own agricultural land, in this case study, a farming couple use their pensions to purchase land from themselves to plan for retirement and help cash flow.

The situation

‘The Smith’s’ farm with their children and want to eventually hand the farm to them. They’ve seen rising costs and fluctuating income over the last few years. They are not planning to retire yet, but it’s not too far away.

The couple have pensions valued at £300,000. They could use SIPPs to purchase part of their farmland or commercial buildings in order to free up some cash. The SIPP isn’t able to hold any ‘residential’ property.

As the transaction takes place between connected parties, the land must be sold at market value. The sales proceeds The Smith’s receive from the SIPPs would then increase the cash flow of their business, increase efficiencies on the farm and help to tide them over.

The transaction will be classed as a disposal for capital gains tax purposes, and stamp duty land tax would be payable by the SIPPs on the purchase price.

The Smith’s then enter into a tenancy agreement with their SIPP and pay rent for use of the land. Again, as connected parties, they must make sure that market rate rent is paid. The rent paid by the couple will be a tax-deductible expense of their business and would also be received by their SIPPs free of any tax.

The Smith’s will no longer be the legal owners of the land, however the SIPP company involved will follow their instructions as long as they comply with HM Revenue & Customs rules. The land will now also be separate from the business. Therefore, if the business were to fail, the land would not normally be available to creditors.

The results

The Smith’s both open SIPPs and use their pension funds to purchase part of their farmland. This releases £300,000 of cash (less capital gains tax) for them and their business. They begin to pay market rate rent to the SIPPs for use of the land.

The couple had worried that the children could lose the farmland when they die.

However, if they name the children as beneficiaries for their SIPPs. When either of them dies, the children would have the option to inherit their SIPPs, including its share of the farmland.

If the couple want to pass the farmland to their children during their lifetimes, the children could also open SIPPs and use their own pension funds to gradually purchase some or all of the farmland from his parents’ SIPPs.

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