Since the abolition of the Agricultural Buildings Allowance a few years ago, farmers have been unable to claim tax relief on the fabric of new buildings.
But according to Dan Knight, manager at Old Mill accountants and financial planners, they can claim a lot more than they realise.
“While the actual fabric of the building is not eligible for tax relief, fixtures, fittings, plant and machinery are all eligible for capital allowances,” he says. “This covers everything from water and electrical systems to milking parlours, cubicles, and grain dryers.”
This year, farmers can claim up to £250,000 in 100% capital allowances through the Annual Investment Allowance – although that is likely to be cut to £25,000 from January 2015. Most expenditure above that threshold can be written down for tax purposes at either 10% or 18% a year.
Tax relief on the structure of the building is where pension planning comes into play.
How does it work?
There are two types of scheme. Small Self-Administered Schemes (SSAS) are usually most suitable for those with a company structure. Contributions to an SSAS can attract full tax relief at between 20% and 23%.
Sole traders or partners can use a Self-Invested Personal Pension (SIPP) , claiming between 20% and 45% tax relief on contributions, although charges are likely to be higher with this type of scheme.
Under both types of scheme, the pension scheme can borrow up to 50% of the value of the fund and then buy the land and construct the shell of the building. “The company or farm business becomes a tenant, and installs any fixed plant and fittings, claiming capital allowances as a result,” says Mr Knight.
A market rent is paid to the pension fund for use of the building, with the rent being tax deductible. “As a pension fund, the SSAS or SIPP does not pay tax on the rental income received, and can either use it to repay debt or continue to build the retirement fund.”
What else should I consider?
There is a £50,000 a year cap on annual pension contributions qualifying for tax relief, with a lifetime limit of £1.5m. However, if the fund value is greater than the lifetime allowance, a tax charge arises when benefits are taken.
Unused allowances may be carried forward from the previous three years and existing pension funds can be transferred in to boost the initial sum.
The transfer of land into the pension fund is likely to incur Capital Gains Tax (CGT) charges. “However, if the company owns the land, indexation allowance is likely to cover an element of the gain. If directors or partners own the land personally, their annual allowances may reduce any liability.”
What happens when I retire?
It is very important to have a long-term plan because the pension fund will likely need to convert its capital assets into cash to provide pension payments.
This can be achieved either by selling on the open market, selling back to the farm business, or, ideally, to another pension fund set up by the younger generation. No CGT will be payable by the pension fund on this transfer but there will be legal and valuation fees, says Mr Knight.
“The pension fund then becomes like any other pension pot – you can take 25% of the fund as a tax-free lump sum, then draw down cash reserves or buy an annuity to see you through retirement. Like any pension, you must ensure you have enough to meet your needs.”
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