Holding Land In A Pension – Is it still the right choice?

For many years, Self-Invested Personal Pensions (SIPPs) have been a useful tool to hold agricultural land because they offered several tax advantages. This includes:

• Any appreciation in land value is free from Capital Gains Tax
• Rental income paid into the pension is not subject to income tax
• The farming business can claim tax relief on rent paid to the pension for use of the land.
• Unused pensions have been free from Inheritance Tax (IHT)

*However, changes announced in the 2024 Autumn Statement means unused pensions will be subject to IHT from April 2027.

Importantly, land held inside a pension will not qualify for Agricultural Property Relief (APR) or Business Property Relief (BPR) even if it is in agricultural use.

This means land held in a pension could face IHT of up to 40% on death, something that was not previously a concern under the old rules. As a result, many people are now reviewing whether holding land in a pension still makes sense for them and are looking at ways to extract cash or assets from their pension.

Most people can take up to 25% of their pension tax free (subject to the maximum of £268,275), as long as they are aged 55 or over (increasing to 57 from 2028). This opportunity is lost if it is not used during their lifetime as it does not pass to a beneficiary upon death. If the owner dies before they reach the age of 75, the pension passes to the beneficiary tax free, meaning draw downs are not subject to income tax. Should they die after the age of 75 the pension income is taxable on the beneficiary.

The difficulty for pensions owning land is that this tax-free cash must be paid in cash. Where a high proportion of the pension value is tied up in land, there is often not enough spare cash available to take the full 25% tax free amount to purchase the land from the pension. To aid liquidity in the pension to fund tax-free cash, the SIPP could borrow up to 50% of its net asset value. The SIPP could then use this cash/borrowing to pay the 25% tax free lump sum to the individuals.

Some people choose to take the 25% tax free lump sum over time, drawing any accumulated cash now and additional cash as and when it arises (e.g. from rental payments). While this can work, it is usually slow and may require regular land valuations adding costs and complexity to withdrawing the land from the pension.

Another option is for the farming business to buy the land back from the pension if it has the cash to do so. This gives the pension cash in return for the land sale, allowing the pension holder to then take their tax-free lump sum. The business would then own the land.

In some cases, the entity may need to borrow money to purchase the land resulting in borrowing costs for the business as well as capital repayments. However, any interest payable on borrowing should get tax relief. In addition, there may well be a cash flow saving on the rent which would no longer need paying to the pension.

The value of the land purchased should then qualify for APR/BPR via the business share, on the basis the entity is mainly trading, resulting in an IHT saving.

The withdrawal from the pension would be IHT neutral in the first instance as the land sale would generate cash in the pension, and any unspent pension would be chargeable to IHT at 40%. However, living off the pension which then has cash to draw, would reduce value in the pension fund and therefore create an IHT saving. After the tax-free lump, any additional pension drawdowns by the individuals would be subject to income tax at the individual marginal rate of tax (20%,40% or 45%).

Some people may continue to make cash contributions into a SIPP either via a limited company or as a personal contribution. This would enable the pension to build up cash over time to increase liquidity and facilitate a drawdown of the 25% tax free lump sum for future land purchases.

While individuals and companies can continue to make pension contributions after the age of 75, such contributions for individual no longer qualify for tax relief (although companies still get corporation tax relief) and therefore individuals should seek advice before they reach this age. In addition, if the individual has drawn income from their pension, the level on contribution made is capped.

Careful consideration is needed when reviewing pensions and it is important that advice is sought from a qualified financial planner.

If you have a pension which holds farmland, now is a good time to consider your options. Please get in touch with us and we can introduce you to our own in-house independent financial planners.