As the commercial marketplace changes, so must the skills of the commercial broker. An area overlooked by many is the area of commercial investments within pensions. Many brokers have advised and structured SSAS and SIPP investments, an alternative to these and more flexible are the funding and creation of EPUTS.
The last minute reversal by the Government on residential property in late 2005 did have an indirect impact on pension schemes investing in unquoted shares, in that the complex legislation brought in to implement this u-turn went far wider than initially thought. The Finance Act 2006 brought in rules which imposed stringent tax charges on any investment made by a SIPP or SSAS in what it called 'taxable property'. As well as direct interests, the tax rules catch (and tax) indirect interests a SIPP/SSAS would effectively acquire in such assets - unless the investment met certain conditions and was sufficiently at arm's length - what HM Revenue & Customs has referred to as a 'genuinely diverse commercial vehicle' .
In many ways the inclusion of genuine arm's length investment in residential property through vehicles such as EPUTs was welcome. However, the issue with unquoted shares was that HMRC included as 'taxable property' not only residential property but what is referred to as 'tangible moveable property'. This term was designed to catch out investments such as antiques, paintings, sports cars etc, the type of pride-in-possession asset classes that have not historically sat easily with the sole purpose test under the previous tax legislation. However, these new tax rules defined 'tangible moveable property' as any asset that can be touched and moved, unless exempt by regulations. That is any asset, no matter how small or trivial or how illogical its inclusion in the taxable property definition. To ensure they did not miss anything HMRC tarred all moveable property with the same brush.
Unquoted shares can still potentially be accommodated in the new tax rules, despite the complications introduced by Finance Act 2006. However, there are issues and risks to consider and we would always recommend professional advice is taken before proceeding. In addition to the taxable property issues other matters need to be considered, including the difficulty (and cost) of valuing the shares on purchase from a connected party (or at a later date when a market value is needed, say on retirement) and the practical process of purchasing the shares and protecting the SIPP trustee's position. When we are buying existing shares we generally require the transaction to take place through a third party (stockbroker/lawyer) to ensure monies are only released at the appropriate time.
An Exempt Property Unit trust (EPUT) is an onshore unit trust with strict restrictions on who can hold units. It has a custodian trustee and a FSA authorised and regulated Operator and Manager. This is designed to ensure that the investment is at arms length.
EPUTS are generally used where two or more investors wish to combine their pension funds (not necessarily held with the same providers) in order to undertake a specific property transaction.
Once established an investors SIPP/SSAS will purchase and hold units issued by the EPUT. The EPUT will utilise the subscription money, together with the funds borrowed from the chosen lender (if applicable) to undertake the required transaction and pay associated costs and fees.
The trustee of the EPUT holds legal title of the assets in trust on behalf of the investor’s relevant pension trustees via nominee companies.
If the EPUT needs to borrow- the loan must be on a limited recourse basis- the lender shall only have recourse to the assets of the EPUT and not back to the investors pension funds or investors personally.
Borrowing is at the EPUTS level and not at SIPP/SSAS level.
An existing property can be transferred from an existing SIPP/SSAS- with title transferred in consideration of units issued to the same value in the EPUTS.
An EPUT can be registered for VAT and can reclaim Income Tax paid when funds reclaimed.
One of our Bank contacts has provided the following illustration:
Property owned in sole name by a client
Planning gained for development of the site for warehouse and distribution.
Told that the SIPP couldn’t take the property- or lend for development. EPUT seen as an option. The idea came from the Banker.
EPUT established and lending arranged against revised value with planning consent- and development funding to 60% of gross developed value. This represented over 100% costs funding- including all fees- £1.8 million. The set up fees for the EPUT amounted to £48k – a share of which passed to the IFA/Broker.
Three further commercial units have been added to the portfolio held by the EPUT. The client receives 6 monthly statements- and is overjoyed with the value added to his possible pension. The EPUT has portfolio valued at £3.2 million and protected from capital gains tax.
The key was the ownership and strong administration from the Bank and trustee. Whilst a simple enough trade- the right administrtaion is key to a seemless completion.
For more information on SSAS, SIPP and EPUT funding feel free to contact Christian Kumar at Money Cubed.
