Mary Stewart discusses the issues surrounding taxable moveable property and how it affects clients' investment decisions
Self-invested pensions can give a huge amount of freedom when choosing asset classes and have become the choice of hundreds of thousands wanting to gain flexibility and control.
As a ‘true SIPP’ provider, we know there are good reasons why our clients come to us, typically because they are keen to make full use of the wider investment choice by placing a range of esoteric investments within their schemes. For some, this is to add a touch of spice to an otherwise conventional portfolio. For others, going outside the mainstream is the central theme of the portfolio.
Many investors are attracted to SIPPs by the opportunity to invest directly in commercial property, particularly where the investment reflects both their commercial and personal objectives. For example, when a business owner uses a pension to make a tax-efficient purchase of the premises their own business operates from.
This is not just shops, industrial units or offices; it also can include less mainstream types of property such as museums, student halls of residence, hotel rooms, cricket grounds, development land, farms and forestry.
Ensure best outcomes for clients
SIPP providers and advisers now must work together in order to ensure the best outcomes for clients. The role of the provider is to ensure the proposed investment is not affected by tax charges, while the adviser concentrates on the suitability of the investment in question for the client. As regulation continues to tighten going forward, we expect the value of this provider-adviser relationship to become even greater.
This has increased the importance of SIPP providers having experienced technical departments able to carry out due diligence on investments and in some cases to help with the structure of the investment to ensure compliance.
Despite this, the grey areas still exist, particularly around taxable property rules. Most recently has been the debate around whether SIPP providers should give a green light to wind turbines and solar panels and where they draw the line on what they consider tangible moveable property.
At the heart of the debate is whether the equipment is integral to the structure of the property or can be removed without damaging it. Each case does need to be looked at on its individual merits but our responsibility is not just stopping investors from crossing at legislative red lights but also ensuring they are cautious when the lights appear to be stuck on amber.
There is an argument that the UK could benefit from actually encouraging investment in renewable energy projects – it could divert some of the millions in SIPPs towards helping the country meet stringent carbon emission reduction targets. Although wind turbines may indeed be tangible movable property because they can be unbolted and moved by crane, in reality there is very little likelihood of a commercial turbine disappearing while the owners’ back is turned.
It would also fit in with investors’ needs to diversify across a range of stable, long-term assets that can produce a reasonable level of regular income.
We have called on the government to consider denoting renewable energy generation equipment as a distinct asset class, exempt from taxable property rules. This could help make commercial property more energy efficient, plus it would capture the imagination of investors wanting to do their bit for the environment. Businesses renting those premises might be willing to pay a higher rent to reflect their lower energy costs, giving the SIPP a more lucrative income stream.
Clients have contacted us asking about the possibility of buying such equipment within SIPPs but have had to proceed with great caution because of the lack of detail within the Registered Pension Schemes Manual. Other providers have also reported interest and AMPS (the Association of Member Directed Pension Schemes) has also debated the issue.
One recent positive development has recently been that within HM Revenue & Customs, it appears that where a ruling has been made by the Capital Taxes Office, responsible for capital gains tax, the same rationale will apply to pension schemes. Therefore a CTO decision for CGT purposes on whether an asset is movable or immovable will be accepted by the pension mandarins too. If a property is sold and the CTO rules equipment attached to it is not ‘movable’, then that allows us to consider it SIPP-able, and vice versa.
However much we enjoy helping to meet the wishes of clients and advisers, we also have to remember one of our duties is to stop them from running into trouble and tax charges later on. SIPP providers are now expected to be both gatekeepers and protectors and if we have to say no, there are always some very good reasons behind that decision.
Mary Stewart is a director of Hornbuckle Mitchell
'Right thing to do'
£69m spent on upgrades
European fintech market 'underserved'