When talking about holding commercial property within a self-invested personal pension (SIPP), it’s easy just to picture office buildings, shops and industrial units.

However, commercial property can also include commercial land. In this case study, two farmers use their pensions to purchase land from themselves in order to plan for their retirement and help cash flow for their business.

The situation

Henry and Sarah farm 1,000 acres in Kent, along with their son Michael. Like many farmers, Henry and Sarah have struggled with rising costs and falling prices for both livestock and cereal. Henry’s family has been farming for generations, and the couple wants to eventually hand the farm to Michael. The couple are not planning to retire just yet, but it is fast becoming a consideration for them both.

The couple approaches their financial adviser, Javier, who conducts a full review of their circumstances and discusses a few different options with them. The idea which particularly stands out for Henry and Sarah is to use SIPPs to purchase part of their farmland in order to free up some cash.

Javier can see that with Henry and Sarah’s combined pension funds, they would be able to purchase £300,000 worth of their farmland. This would be a connected party transaction.

Javier explains that the SIPPs can potentially purchase the farmland and commercial buildings, but cannot acquire the family home or garden. These must be physically separate and independently saleable to ensure that the SIPPs only purchase commercial property with no residential element. The SIPPs also can’t purchase any of the livestock or crops. Henry asks whether the SIPPs can purchase the farm machinery, but Javier confirms that this would not be possible as this would also incur significant tax charges for the SIPPs.

Javier then explains the connected party transaction in more detail. He tells Henry and Sarah that once their pension funds are within their new SIPPs, they can then sell the farmland to the SIPPs.

As the transaction takes place between connected parties, the land must be sold at market value, which will be independently verified by a qualified valuer. The sales proceeds that Henry and Sarah receive from the SIPPs would then increase the cash flow of their business, increase efficiencies on the farm and help to tide them over.

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

Henry and Sarah would then enter into a tenancy agreement with their SIPP provider 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 would be a tax-deductible expense of their business and would also be received by their SIPPs free of any tax.

Henry is initially concerned about losing control over the land. Javier assures him that although they will no longer be the legal owners of the land, the SIPP provider will follow their instructions as long as they comply with HM Revenue & Customs rules. The land will also be separate from their home and removed from the business. Therefore, if the business was to fail, the land would not normally be available to creditors.

The results

Sarah and Henry 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 Michael could lose the farmland when they die.

Javier explains that Sarah and Henry can each name their son as the beneficiary for their SIPPs. When either of them dies, Michael would have the option to inherit their SIPP, including its share of the farmland, and keep it in his own name.

Javier adds that if the couple wants to pass the farmland to their son during their lifetimes, Michael could also open a SIPP and use his own pension funds to gradually purchase some or all of the farmland from his parents’ SIPPs.

Jessica List is pension technical manager at Curtis Banks Group