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What constitutes taxable property in a SIPP?

22 July 2018

Martin Tilley, Director of Technical Services, Dentons Pension Management looks at the rules around taxable movable property, some unusual circumstances and assessing the risks involved.

As a SIPP provider, we are often asked to comment on the acceptability of an asset. Despite the uncertainty surrounding SIPP due diligence, one point is not in dispute and that is the willingness to avoid taxable property.

The Finance Act 2006 rescinded HMRC’s discretionary approval practice and introduced the current registered pension scheme regime. From this date, the “permitted investment list” was withdrawn, meaning that in theory a SIPP can own any asset at all, albeit in doing so, certain conditions would need to be met or the asset could result in substantial tax charges on the member and scheme administrator.

A SIPP is classed as an investment regulated pension scheme, which is one where the member is able to influence how their pension pot is invested and as a result consideration needs to be given to all investments and whether they might include taxable property.

Categories of taxable property

There are two categories of taxable property, residential property and taxable movable property. Residential property is probably the easiest to identify. It is simply a building or structure used or capable of being used as a dwelling. Land adjoining or intended for use connected with a dwelling would also be deemed residential.

It is a misconception that residential property being used as a business, perhaps as a buy to let or holiday home, can be deemed commercial property. HMRC will see the building as what it is irrespective of its current use. After all, any leasing agreement can be terminated at any time at which point the asset would revert to residential in any event.

The second category is taxable movable property, sometime also referred to as tangible movable property. It is, as the name suggests any asset that can be touched or moved. The intention of the legislation here was to prevent investment into classic cars, antiques, jewellery and such-like. However, defining what is tangible movable property is more complex than you might expect.

When holding commercial property, the structure of the property itself is obviously not moveable as would be boilers and central heating systems, which are integral to the building to enable its permitted use. However, moveable internal partitioning and office furniture would almost certainly be regarded as tangible moveable property and if owned by the scheme would lead to tax charges. It is sometimes explained that to determine what is moveable, the building should be picked up, inverted and shaken. Anything that falls out would be taxable movable property.

Unusual circumstances

There are however some more unusual circumstances where taxable movable property arises and other situations where a decision is too close to call.

Forestry is a permitted and ecological investment. If forestry investment is held in a SIPP, it is difficult to argue that a tree is a movable asset, but when felled, it arguably is. A SIPP can hold forestry though, but it would be necessary to lease the land to a tenant responsible for managing trees and who would be responsible for felling them and any profit that derives from them. The same applies to agricultural land, which should be leased and farmed to avoid any crops grown being held as taxable property.

Other popular proposed “green” investments are wind turbines and solar panels. Wind turbines come in many sizes from small turbines attached to houses to the substantial variety making up wind farms. HMRC guidance confirms that there is no fixed classification for these investments so each should be reviewed on its own merits.

Similarly, if solar panels are attached to a building after construction it is logical that if added, they could be removed and thus are not part of the permanent structure.  Whereas those built into the roof as part of the original build process most probably could not be removed without damaging or compromising the integrity of the building.

Assessing the risk

It will therefore be necessary for the SIPP provider to assess each case on its own merits. The problem with such a process is the uncertainty of outcome and the penalties for being deemed on the wrong side of HMRC’s opinion are substantial.

If deemed taxable, an asset will trigger an initial tax charge of 40% of the asset value on the SIPP member and a further 15% tax charge will apply to the SIPP itself. If the value of the offending asset is valued at, more than 25% of the total SIPP value a further 15% tax is charged to the member.

Another oddity as mentioned in the legislation determines a beach hut as taxable property, by virtue of it being residential. I’d wager that perhaps only the homeless would relish the idea of living in a beach hut and perhaps they would better deemed taxable property by virtue of the fact they can be moved.