The complexity of the Finance Act 2006

26 October 2006

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The complexity of Finance Act 2006 legislation now appears to undermine the essence of the Government's previously vaunted pension simplification policy, says James Hay's Jan Regnart.  I think it is safe to say that those of us involved in the sale or administration of SIPPs were more than a little surprised to see that the Finance Act 2004 (the legislation that introduced the simplified pensions taxation regime) contained only one restriction regarding investment in company shares, and this applied only to occupational pension schemes.

 

The restriction in question, 'S180(5)' limits the amount that an occupational pension scheme can invest in any one sponsoring employer to a maximum of 5% of the fund value, and overall investment in shares in sponsoring employers capped at 20% of the value of the fund, with those restrictions being tested at the time the shares are purchased, and re-tested when further shares in the sponsoring employer(s) are bought.

 

There was however, nothing in the 2004 Act to prevent a SIPP investing a member's entire pension fund in his own company's shares, and whilst in his pre-Budget report the following December, the Chancellor dropped the bombshell that the Government would be removing the tax advantages for investment in residential property, and so called   "exotic" assets, there was nothing to suggest that this would impact on investment in company shares.

 

When this legislation was introduced in the form of the Finance Act 2006 the tax advantages for investment in residential property and tangible moveable assets such as works of art, jewellery , vintage cars etc. were indeed rescinded, and the legislation went on to set out the tax charges that will apply when a scheme invests in taxable property covering direct and indirect investments.   So, for example, if a scheme invests in shares in a company, which invests in residential property the scheme may be deemed to have invested in taxable property, however indirect investment in a trading company which owns taxable property is permissible if:

• The pension scheme does not have control of the company either alone or together with associated persons;

• No member or person connected to a member is a controlling director of the company or any other company which holds an interest in the company, either directly or indirectly; and
• The pension scheme does not permit a member or person connected to the member to occupy or use the property.

"Associated person" includes:

• A member of the scheme;

• A person connected with a member;
• An arrangement under any pension scheme relating to a member of the scheme or any person connected with such a member;
• Any associated pension scheme.

Regulations exempt indirect holdings in tangible moveable property from being taxable property if:

• The market value of the asset is no more than £6,000

• The asset is held indirectly by the scheme
• The asset is held solely for the administration or management of the company
• A scheme member or anyone connected to a member cannot occupy or make use of the asset.

These changes, introduced to deter indirect investment in residential property and tangible moveable assets, effectively prohibit investment in shares in a member's own company. Where a SSAS or a SIPP invests in shares in a connected company the scheme administrator will be obliged to check whether the company owns residential property or works of art or any other tangible moveable property including assets used in the day to day operation of the company which exceed £6,000 in value.   Such assets would include office furniture, plant and machinery but would also include directors' cars and commercial vehicles, if owned by the company.

 

It's likely that independent scheme administrators and SIPP providers will find the task of monitoring a company's assets too onerous and that this will prohibit such investments. Moreover, given that these restrictions are in addition to the original limitations applying to a SSAS (i.e. the 5% of fund value cap on shares in a sponsoring employer) then the resultant complexity of this legislation now appears to undermine the essence of the Government's previously vaunted pensions simplification policy, undoubtedly compromising a process which was originally conceived to "create confidence, comprehension and clarity and to enable individuals to participate in the concept of saving for retirement which is critical to our future prosperity and that of the UK economy( 1) "

 

(1) Simplifying the taxation of pensions: the Government's proposals, 10 December 2003