With commodity prices falling many farmers will be thinking twice about making any significant investment in their farm but for some, with a bit of imaginative advice from your accountant it may be possible to use your pension fund to invest in a new farm building for example and in so doing cut the overall cost of such an investment.
For example Mike Butler, partner at Old Mill accountants who have recently moved to new offices in Wells, recently helped a Wiltshire based farming business save more than £180,000 on building a new grain store.
“The idea is that you use a self-invested pension to pay for the land and build costs,” he says. “That provides tax relief against profits of between 20-45%, depending on whether you trade as a company, sole trader or partner.”
Once built, the farm can then rent the grain store off the pension fund. The rent paid by the farming business will be a tax deductable expense, thereby saving income or corporation tax while the rent received by the pension fund can either be used to build up reserves in the fund or to pay off any borrowing which the fund may have taken out to support the cost of the project.
Obviously this only works if the underlying business is profitable and is therefore able to pay the rent but if this is the case, significant savings can be made. However, such a project requires careful planning to avoid any pitfalls. “Start planning well in advance to allow the financial planning team to register the pension fund, take care of invoicing and pricing, and ensure appropriate VAT is reclaimed in good time,” warns Mr Butler.
“You also need an exit plan in place to release the pension funds when you do come to retirement.” This can be done by selling the building on the open market, selling back to the farm business, or, ideally, to another pension fund set up by the younger generation.
But clearly some farm buildings, particularly if they are located in the heart of a farm building complex may be difficult to sell on the open market and so if selling in this manner is your chosen exit strategy, I would advise that you take care to ensure the building is suitably located so that it is saleable.
So if you are contemplating making a significant investment on your farm and also have an eye on your long term retirement plans I suggest you approach your accountant to investigate the potential available to you.
For example Mike Butler, partner at Old Mill accountants who have recently moved to new offices in Wells, recently helped a Wiltshire based farming business save more than £180,000 on building a new grain store.
“The idea is that you use a self-invested pension to pay for the land and build costs,” he says. “That provides tax relief against profits of between 20-45%, depending on whether you trade as a company, sole trader or partner.”
Once built, the farm can then rent the grain store off the pension fund. The rent paid by the farming business will be a tax deductable expense, thereby saving income or corporation tax while the rent received by the pension fund can either be used to build up reserves in the fund or to pay off any borrowing which the fund may have taken out to support the cost of the project.
Obviously this only works if the underlying business is profitable and is therefore able to pay the rent but if this is the case, significant savings can be made. However, such a project requires careful planning to avoid any pitfalls. “Start planning well in advance to allow the financial planning team to register the pension fund, take care of invoicing and pricing, and ensure appropriate VAT is reclaimed in good time,” warns Mr Butler.
“You also need an exit plan in place to release the pension funds when you do come to retirement.” This can be done by selling the building on the open market, selling back to the farm business, or, ideally, to another pension fund set up by the younger generation.
But clearly some farm buildings, particularly if they are located in the heart of a farm building complex may be difficult to sell on the open market and so if selling in this manner is your chosen exit strategy, I would advise that you take care to ensure the building is suitably located so that it is saleable.
So if you are contemplating making a significant investment on your farm and also have an eye on your long term retirement plans I suggest you approach your accountant to investigate the potential available to you.
James Stephen MRICS FAAV
Partner
Rural Practice Chartered Surveyor, Wells
T: 01749 683381
E: james.stephen@carterjonas.co.uk
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