It is now over five years since “pension freedoms” were introduced which make pension contributions much more flexible and tax-efficient. As a result, many farming families are now considering pensions, taking in to account their many benefits, as part of their wider financial planning. Below are three case studies which show some of the ways pensions can be used.
There is a lot of speculation at present as to what the Chancellor might do in the coming months and years to repay the debt created by the COVID pandemic. It is possible that tax relief on contributions could be restricted to basic rate taxpayers, but there is no suggestion that the freedom to decide on the level of benefits withdrawn each year or the Inheritance Tax benefits will be withdrawn.
Example 1: A farming family would like to purchase more land to expand their business. They operate their business through a limited company. The company can make pension contributions on behalf of all four family members which are tax-deductible in the company accounts. These pension funds can then be used to purchase land. There is a further tax saving on the rent charged by the pension fund to the company. The pension contributions can be maximised, with the use of ‘carry forward’ of unused tax relief from earlier years. The pension fund will then rent the purchased land to the company which produces a further tax saving.
Example 2: A 60 year old farmer has £100,000 in a pension fund and expects that some of his property may be sold for development in a few years’ time. This will result in a large capital gain and he is worried about the rumoured increases in Capital Gains Tax (CGT) rates. In the meantime, he needs finance for building improvements on the farm.
Part of the development property could be sold to the pension scheme which can sell the property tax-free in the future. The sale to the pension fund is a disposal for CGT purposes, but the gain is calculated using the current value of the property and taxed at current rates of tax.
Example 3: The senior members of a farming family have got a potential Inheritance Tax problem and wish to pass money to their grandchildren, whose ages range from 2 to 14 years old. One way of achieving this is to pay up to £2,880 per year into a pension fund for each grandchild. This can be increased to £3,600 per year with tax relief, which should grow significantly by the time they draw their pensions. Where a person makes regular gifts out of surplus income, they are free of Inheritance Tax even when they exceed the normal £3,000 gift limit.
Here are some key actions to ensure you make the most of the money in your pension funds:
The above examples and commentary, including the many benefits that pensions can provide, is for information purposes only. It is important, before any action is taken, to engage with a regulated financial adviser who will fully review your individual circumstances and objectives and provide advice personalised to your situation. Depending on your circumstances there may also be other forms of savings and investments that are more suitable to your needs and requirements.