The rules around registered pension schemes are set out in HMRC’s Pensions Tax Manual. This includes various sections on investments.
Whilst there are no restrictions on an investment that can be held in a registered pension scheme, including alternative investments, there are tax implications from holding certain investments or from certain investment transactions. These are more onerous for SIPPs and SSASs. The following is a summary of some of the circumstances linked to scheme investments that could give rise to tax charges.
Taxable property consists of residential property and ‘tangible moveable property’. Residential property includes residential ground rents, timeshare/holiday homes and the grounds of residential properties. Tangible moveable property includes art, antiques, fine wine and vintage cars. In effect, anything that one can touch and move potentially falls into the tangible moveable property category. In addition the scheme member and connected parties must not derive any personal use or enjoyment from the property.
There are some exceptions:
- ‘Job related’ residential property can be held without a tax charge applying where the residential property is occupied by an employee as a requirement of their job, for example a caretaker’s flat or flat above a shop occupied by the shop owner. The employee or shop owner must not be the pension scheme member or a person connected to that member.
- Where the taxable property is held indirectly through a genuinely diverse commercial vehicle (GDCV) it may be exempt from the tax charge – a GDCV can be a Real Estate Investment Trust (REIT) or another type of arrangement such as a collective investment scheme. Certain conditions need to be met depending on the type of GDCV used to ensure that the holding is part of a diverse commercial arrangement – such as the number of investors and assets and properties held and the total value of the assets. Common to all is that the scheme member and connected persons cannot obtain any personal use or enjoyment from the property or assets held by the company. Animals, such as racehorses, cannot under any circumstances, be held by the GDCV.
- Generally trading companies owning taxable property, most likely in the form of tangible moveable property – this could be stock, fixtures, fittings, machinery or equipment will not cause tax to be payable. If, however, the pension scheme together with anyone associated or connected to the scheme member controls between them 20% or more of the company then tax will be payable on any taxable property held by the company.
- Some tangible moveable property is exempt, specifically where the tangible moveable property is used as part of the management and administration of the trading company and are of a low value (less than £6,000 i.e. office equipment).
- Investment grade gold bullion is allowed – the gold needs to remain in vaults rather than on the mantelpiece.
Where taxable property is deemed to be held in a SIPP or SSAS the tax charges can be high:
- an unauthorised payment charge of 40% of the value of the taxable property levied against the member at the time of the investment
- a surcharge of a further 15% if the unauthorised payment exceeds 25% of the pension fund’s assets
- a scheme sanction charge of 15% of the value of the investment
- a scheme charge of 40% on any income received or deemed income, and
- a scheme charge of 40% of any capital gain on disposal of the taxable property levied.
The scheme sanction charges are levied on the scheme administrator who will then look to recover these from the pension fund.
transactions with scheme members or their connected parties
Registered pension scheme can buy and sell assets to and from scheme members and their connected parties. As long as a fair market value is paid, often referred to as an ‘arm’s length transaction’, no tax will be paid. If however the asset is sold to the scheme member or a connected party below market value or bought from such a person at an inflated price by a SIPP or SSAS tax charges could be incurred.
The tax charges being:
- an unauthorised payment charge of 40% of the value of the unauthorised payment levied against the member at the time of the transaction,
- a surcharge of a further 15% if the unauthorised payment exceeds 25% of the pension fund’s assets, and
- a scheme sanction charge of 15% of the unauthorised payment.
Such tax charges are also payable where valued shifting has occurred without any transaction with the member or connected parties. This is where connected parties are able to influence the value of an investment, resulting in an increase in favour of connected parties. E.g. where the right to a dividend is removed from one class of shares held within a SIPP whereas the share classes held outside the SIPP by the scheme member retain the right to a dividend. This could reduce the value of shares held within the SIPP and increase the value of the shares held individually by the scheme.
In addition a loan cannot be made to a connected party without incurring tax charges, although a SSAS may make a loan to a sponsoring employer subject to specific conditions.
Where a pension scheme carries out a trade, this is subject to tax. Whether an activity or investment constitutes ‘trading’ is judged on its merits. There is no single HMRC definition of trading although the “Badges of Trade” are a useful guide as to whether an activity is judged to be trading. These include:
- Profit seeking motive
- Number of transactions – systematic and repeated transactions
- Nature of assets involved – can only make a profit if sold
- Existence of similar trading transactions – e.g. the scheme member already does the same as their business or frequency of similar transactions by the scheme
- Changes to the asset – the asset is modified in order to sell at a profit
- Way the sale was carried out – transaction typical of trading organisations
- Source of finance – repayment of any borrowing to purchase the asset is to be on sale, and
- Time between purchase and sale – selling shortly after sale.
The above badges will not be present in every case and even where one of more of the ‘badges’ is present it does not necessarily mean the activity is classed as trading.
value added tax (VAT)
VAT will not generally impact pension schemes other than VAT on fees payable from the pension scheme. The main exception is where a pension scheme owns commercial property where an option to tax for VAT has been made by the seller of the property or the trustees. Where the seller has opted to tax the property then VAT will normally be charged on the sale. To recover the VAT the trustees need to opt to tax for VAT. The trustees will then need to charge VAT on the rental and ultimate sale. Accordingly the trustees will need to make quarterly VAT returns.
stamp duty, stamp duty reserve tax and stamp duty land tax
A pension scheme is not exempt from these and accordingly will need to pay these taxes on investment transactions.
Any overseas investment may be subject to tax in that jurisdiction and care should be taken when considering such investments.