Unquoted shares could follow residential property and other more esoteric assets, and become effectively banned from self-invested personal pensions (SIPPs) in the Budget next week, warns A J Bell group.
With many issues still waiting to be clarified, next week’s budget is seen by many as the time for key announcements, including rules on Inheritance Tax (IHT) and how it applies to pensions.
A J Bell Group gives the prospect of a Budget announcement on how IHT will affect pensions a 90% chance, as legislation clarifiying the issue was meant to have been released in the New Year.
It also rates the chances of other key announcements appearing in the speech on 22 March. The publication of “permitted” investments rules in Sipps, and a definition of what constitutes a residential property, have a 60% chance, while the extreme idea of postponing A-Day for another year is less likely with a 10% chance.
However the possible banning of unquoted shares in Sipps has a pretty good chance of appearing, at 60%, according to A J Bell, because of the seemingly unlimited capacity to purchase unquoted shares.
At the moment, small self-administered schemes (SSASs) can invest up to 30% of its fund in unquoted shares, while SIPPs are unable to hold any. After A-Day, as the legislation stands now, SSASs will be allowed to invest an unlimited amount of its fund into the assets, providing the company involved is not connected to the member, such as a sponsoring employer.
But if there is a connection, a SSAS can invest up to 5% of its fund into a company, and if there is more than one sponsoring employer, the 5% rule applies to each company up to a maximum of 20% of the fund.
For SIPPs however, there is no restriction on SIPPs investing in unquoted shares, whether or not the company is connected to the member, which according to A J Bell is quite a leap of faith for her Majesty’s Revenue and Customs (HMRC).
Andy Bell, managing director of the A J Bell group, suggests there are reasons why this could be a problem depending on the motivation behind the investment. Buying shares in third-party companies purely for reasons of maximising investment is not really much of a problem, issues arise when the company is connected to the member.
There are two main ways the unlimited use of SIPP funds could be turned to the advantage of the member. One is by buying shares in its own company either for re-investment or to solve a liquidity problem, and the second is by selling personal shares in accompany to a SIPP, which is similar to the first one, but instead of giving money to the company it is giving it directly to the member.
As a result, Bell believes HMRC will either outlaw investment in SIPPs in unquoted shares completely, or they will follow the SSAS model and restrict it to 5% of the fund value.
In a paper outlining the issues surrounding unquoted shares as investments, Bell says despite his fairly negative views on the issue, “there are aspects of investing in unquoted shares that do not sit comfortably with a tax privileged regime, although there are other aspects which do. My hope is if we approach this issue sensibly, then investment in unquoted shares will remain an integral part of the new pensions regime for many years to come.”
Maureen Duckworth, pensions technical manager, at Scottish Life, agrees the issue is likely to come up in the Budget and that something will be put in to remove the ability now that it’s dawned on everyone there is no restrictions for SIPPs.
She adds: “I think they will put something in the Budget to remove it completely. Although putting a limit on it is an alternative, and would keep it on an even keel with SSASs if you are a controlling director. But it’s difficult to see how they could do it without re-introducing the connected person’s rule, as it would have the same effect if a family member did it instead of the individual. As the rule is only being removed after A-Day, the last thing we want is for it to be raising it’s head again.”
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