22 August 1997

Buy land and save tax at 40% through SIPP

TAX savings of 40% can be made against land if it is bought through a self-invested personal pension (SIPP), says Nic Marsden of pension fund management company London York.

Mr Marsden says farmers are often not interested in pension fund investment. "They are much more interested in buying land to add to their existing holding, if it becomes available," he says. "Using a SIPP, they may be able to combine the two."

The SIPP works by creating a personal pension fund which then invests in the land, possibly also with a top-up mortgage. The farmer pays pension contributions into the fund, and these enjoy normal tax relief.

The fund should be at least £75,000 to cover the fixed charges involved, says Mr Marsden. And the land purchase should be a sound business proposition in its own right. A substantial proportion of the individuals tax liability should also be at the 40% rate, for it to make financial sense.

There are other strings attached. The individual should not enjoy any personal benefit, for example a house or sporting rights, from the purchase. And land may not be purchased from "connected parties" – in particular, members of the family.

This latter restriction is a potential pitfall when the time comes to exit the SIPP, says Grant Thorntons financial planning manager, Philip Bailey.

"Although you can defer an annuity until age 75, it must be liquidated then, and the land cannot be sold on to another member of the family," he says.

One way round this may be for the children to set up a ready-in-waiting pension fund with the same trustees as those running the fathers, so that transfer can be smooth.