SIPPS – Non UK commercial Property – Capital Adequacy rules
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What is a SIPP?
A SIPP is a personal pension plan which enables you to choose from the full range of investments approved by the government. They can invest in (inter alia) shares and commercial property in the UK and abroad. They have good tax advantages and usually appeal to higher paid individuals. About £100 billion is currently administered through SIPPs.
Who runs them?
SIPP operators, who are regulated by the Financial Conduct Authority (“FCA"), control the assets and ultimately decide whether an asset is acceptable to be held within the SIPP. SIPP operators include major international banks to small specialist operators.
What is the FCA’s current concern?
From time to time SIPP operators leave the market either by selling their businesses or closing down. In the latter case there is a risk people's pension savings could be put at risk if the closure is as a result of the SIPP operator failing. The FCA wants SIPP operators to have sufficient capital to fund an orderly closure without money having to come from people’s pensions to fund the closure and transfer of their assets to a new SIPP provider.
So this means SIPP providers will have to have more capital in reserve?
Yes they will have to have more of their own money at risk in their businesses. Understandably his is not popular with many SIPP operators. The new capital requirements will apply from 1 September 2016. It will see smaller SIPP operators being forced to merge or leave the market which will increase costs to consumers and reduce choice. It will mean larger more inflexible SIPP providers will dominate the industry which is not in the consumers interests.
Surely most assets can be sold or transferred easily to a new SIPP operator so why the problem?
Yes most assets such as cash balances and quoted shares can easily be transferred and if a SIPP provider fails other providers will be pleased to have these assets transferred to them and receive the fees for holding the assets in their SIPP. However some assets which are in niche or specialist areas may not be acceptable to many SIPP operators or may take some time to transfer.
Which assets does the FCA not see as “standard” i.e. non-problematic assets?
The list includes cash, corporate bonds, physical gold bullion, National Savings and Investment products, listed UK and foreign shares and UK commercial property. In the case of UK commercial property it is only standard if it can be transferred in not more than 30 days. If there will be any difficulty in transferring UK property within 30 days it is deemed to be non-standard and the SIPP operator has to identify it as such and it will increase the SIPP operator’s capital requirement.
What does the FCA see as non-standard “problem assets”?
One asset is non UK commercial property which is automatically non-standard. This means any SIPP provider which accepts non UK commercial property will be penalised by having to be higher capitalized for doing so. Most SIPP operators will be disinclined to accept such property. There is no distinction made between EU and non EU commercial property.
Doesn’t this breach EU rules?
You would think it prevents the free movement of capital within the EU and is a blatant infringement of the EU treaty. An individual who wants to invest in commercial property in an EU member state will firstly find fewer SIPP operators prepared to do so and secondly will face higher charges to fund the higher capital requirements. It will also make it harder for smaller newer SIPP operators to enter the market. This is a retrograde step for the SIPP industry because it significantly reduces investor choice. A judicial review of the proposed changes has been started.
What other options are there?
If you will be over 55 on 6th April 2015 the changes to the pension rules will allow you to take all your pension money out of your SIPP, subject to UK tax charge. However if you are planning to retire abroad there may be no UK tax charge anyway if you become non UK resident and you may decide simply to take your money out of your SIPP and invest in any asset which would include residential buy to let in the UK or abroad or in a foreign commercial property. You need to check the tax position in the country of residence to make sure the SIPP money you receive when you close your SIPP will not be taxed say as income there. Generally it should be viewed as capital and will usually not be taxed or taxed lightly.
David Anderson Solicitor Advocate, Chartered Tax Adviser and barrister (unregistered)
Sykes Anderson Perry Limited