RP case studies: SSAS innovation harvests farming family tax saving

In the latest RP case study, Dentons' Stephen McPhillips runs through a fascinating SIPP/SASS/wind turbine scenario which brought about substantial tax savings for a farming family

The Wilson family are third-generation farmers.

They farm commercially through their limited company business structure, which owns large tracts of agricultural land of varying topography and quality.

On one of the more exposed sites, the company has diversified and allowed installation of several wind turbines and a supporting sub-station. While taking up a relatively small footprint on the land, rent paid to the company by the operator of the turbines is substantial and it is adding to the overall profitability of the farming company. In turn, this is inflating the company’s corporation tax bill each year.

The five directors request a meeting with their accountant, Kathy, to discuss options to mitigate the tax liabilities and, while conversant with possible self-invested pension (SIPP) options, Kathy suggests that a financial adviser connection of hers, Paul, sits-in on the meeting too.

During the meeting, Paul discovers that none of the five directors have any existing private pension provision in place, but that they are open to the idea of establishing a new scheme or schemes.

Paul explains to them the concepts of annual allowance (AA) and carry forward of unused AA and he also explains the tax benefits of employer pension contributions. Paul confirms that the maximum tax relievable employer contribution would be £200,000, £40,000 per director, in the current tax year because there is no carry forward capability, and that a further £200,000 could be paid in the next tax year.

Paul then goes on to explain that if the money is paid into a SIPP or schemes, it may be possible for the scheme(s) to purchase part or all of the land from the company at an open market value to be confirmed by a Royal Institution of Chartered Surveyors (RICS) registered valuer.

The directors realise quite quickly that the money paid into the pension(s) by the company will find its way back to the company as soon as the purchase is completed. They are very pleasantly surprised that such a route is a viable option that will reduce the company’s corporation tax liability but at the same time not deprive it of cash long-term.

Having outlined the possibilities in broad terms, Paul suggests that the next stage should be a joint meeting with a trusted provider of self-invested pensions in order that the technicalities and practicalities can be discussed in detail. The directors agree and all five, Kathy and Paul meet with Paul’s preferred provider. The directors take site plans and maps to the meeting so that the extent and location of the site are clear to all.

Land-locked

It becomes clear at the meeting that the parcels of land on which the turbines sit are effectively land-locked by other land owned by the farming company.

This makes it impractical for these parcels to be isolated for ownership by self-invested pension(s) because future marketability might be restricted due to access problems and so on.

The trusted provider also obtains confirmation that the wind turbines themselves would not be owned by the pension scheme(s).

Paul and Kathy note that the turbines would be classed as “tangible moveable property” and hence taxable if owned by the pension scheme(s). The directors explain that the larger parcel of land on which the turbines sit is valued at £550,000, that it is accessible from a public road and that it has clearly defined boundaries and physical borders.

The directors decide that they will establish a new small self-administered scheme (SSAS) because all five of them will be members and it presents economies of scale over five SIPPs.

They also decide that the initial employer contribution will be £200,000, followed by a further £200,000 at the beginning of the following tax year, which was quite close. With the money in the SSAS, the trustees buy a part share of the £550,000 parcel of land for £375,000 and the SSAS receives rent based on its proportionate share of the land, around 68%. This means that only 32% of the rent is now received by the limited company.

The net result is that the company achieved significant corporation tax savings, through pension contributions and reduced rent receivable, and the directors began to accumulate substantial pension funds for themselves for the first time.

Stephen McPhillips is technical sales director at Dentons Pension Management