Neil MacGillivray takes a look at the esoteric investments clients can put in a SIPP or SSAS
Faced with challenging investment conditions some investors contemplate esoteric investments as a way of maximising investment return on their pension fund.
While such investments usually carry more risk, their suitability as a pension investment deserves careful scrutiny. There is no strict definition of ‘esoteric investments' and what follows is a brief review of some of the more popular investor requests.
Under the Finance Act 2004, Schedule 29A, both SIPP and SSAS are classed as investment regulated pension schemes and where such schemes hold taxable property, directly or indirectly, tax charges result.
Indirect holding occurs where a scheme holds an interest in a vehicle, which in turn owns taxable property or holds an interest in another vehicle that owns taxable property.
Not all indirect holdings of taxable property give rise to tax charges. Provided the vehicle that owns the taxable property meets the definition of a ‘genuinely diverse commercial vehicle' no tax charges apply.
In a trading company, the identity of shareholders and their respective shareholdings are important in determining whether the company is a genuinely diverse commercial vehicle.
The company may not own any taxable property and therefore no tax charges would arise.
However, given that the definition of taxable property includes tangible moveable property (i.e. most things that can be touched and moved) many providers do not sanction the holding of shares in companies that are not genuinely diverse commercial vehicles.
Third party loans
A loan made by a registered pension scheme to a person who is, or has been, a scheme member or person/company connected with the person who is, or has been, a scheme member or sponsoring employer will result in an unauthorised payment equal to the amount of the loan.
However, these tax charges do not apply where authorised employer loans are made by SSAS to sponsoring employers.
For a company to be connected to the member, the member either alone or together with connected persons has/have control of the company. For example if the member owned 1% of the share capital in Company A and the member's sister owned a further 50%, Company A would be connected to the member.
Wind turbines and solar panels
The issue is whether they are classed as taxable property. HMRC guidance confirms that classification is determined on a case by case basis.
A substantial wind turbine on a wind farm is unlikely to be treated as tangible moveable property.
Whereas a turbine attached to a house or a lightweight rotating blade on top of a mast is likely to trigger the charges associated with taxable property as being residential or tangible moveable property.
The size of the asset is not itself a determining factor. However, if the wind turbine is large and is fixed to the ground so as to become part of the land interest then it will not fall within the definition of tangible moveable property.
If the scheme owns the land on which a large wind turbine is fixed and is selling the electricity being generated, the scheme may be deemed to be trading and therefore liable for tax on trading income. A leasing arrangement with a third party may solve the problem.
In the case of solar panels where these are integral to the building and the pension scheme purchased the building and in doing so the solar panels as well, current HMRC guidance is that the panels would not be treated as tangible moveable property.
The Intellectual Property Office is the official government body responsible for granting intellectual property (IP) rights in the UK. IP can be bought, sold, and this opens up the possibility for it to be held as a pension scheme asset. IP is intangible and therefore not classed as taxable property.
Whether IP will be allowed under SIPP or SSAS is likely to be determined by how easy it is to establish ownership and value it. The cost of valuations will be met by the scheme.
Many SIPP and SSAS providers assume the responsibilities of trustee and scheme administrator. As trustees they have a duty to act in the best interest of the members; therefore risk at scheme level must be controlled.
Investments that require manual workarounds as part of the administration process put pressure on costs. These fiduciary and commercial considerations, together with any regulatory obligations, influence the choice of investments available under their schemes.
Neil MacGillivray is head of technical support at James Hay Partnership
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