Where can you invest in a SIPP?

Steve Latto, head of pensions at Alliance Trust Savings, looks at the different investment options available within a SIPP

Much has been said about investment flexibility within SIPPs, but what exactly does that mean?

With a conventional personal pension, individuals’ investment options are often restricted to the insurance funds offered by the particular life office. However, for the individual who wants to take full control of their pension investments, the only real option is a SIPP.

But what are the different investment options available within a SIPP? And what are the key points you should consider to ensure your clients’ SIPP investments do not breach HM Revenue & Customs (HMRC) regulations or suffer significant additional tax charges?

Stocks and shares

The holding of publicly quoted shares, gilts, debentures and loan stock is relatively simple and straightforward. Within a SIPP, these will either be held via the SIPP provider’s platform or through a third-party stockbroking or discretionary management account.

Problems can arise where a SIPP acquires shares in a private or unquoted company as an investment of this nature can give rise to significant tax charges. To avoid the tax charges:

• the SIPP member or a family member cannot be a controlling director of the company;
• the SIPP’s total shareholding in the company must be less than 20% including any shareholding that the member or other family member may hold personally, and;
• the member cannot personally use any of the assets of the company.

Commercial property

Commercial property, whether in the UK or elsewhere, can be held within a SIPP. However, most SIPPs that permit investment in commercial property do not allow investment in overseas properties.

Commercial property does not just include the normal bricks and mortar offices, warehouses, retail units and factories but also covers land (including farmland), woodlands, forestry and the slightly more unusual such as a hall of residence for students. As long as the use of the property is commercial then it can be considered for inclusion in a SIPP.

The property can either be purchased by the member on their own or jointly with other SIPP members or individuals. This includes property syndicates.

Residential property

Generally it is not possible for residential property to be held in a SIPP because of the penal tax charges. Residential property covers a building or structure that is used or suitable for use as a dwelling, any related land that is wholly or partly in the grounds or garden of the building or structure and which is used or intended for use for a purpose connected with the enjoyment of the building.

There are a small number of specific exceptions for job-related accommodation.

Bank accounts

Some SIPPs allow cash to be held in third-party bank accounts. Those SIPPs that do offer flexibility often restrict investment options to a panel of bank accounts. Others offer complete flexibility.

If you are looking at bank account options for a client, it is important to ensure the account permits investment into it by the trustees of a pension scheme. Some of the online accounts that pay higher rates of interest are not suitable for SIPPs because they are only available to personal account holders.

Loans

Even though a SIPP cannot make a loan to a connected company or individual, it is possible to make a loan to an unconnected third-party individual, company or partnership.

The actual terms of the loan are not subject to specific HMRC regulations and can be agreed between the SIPP member and the borrower. This includes the term, the loan amount, repayment terms and the interest rate.

All that you need to bear in mind is that the loan should be a genuine investment of the SIPP and be prudent, secure (but this does not necessarily mean that security has to be taken) and on a commercial basis.

Borrowing

The most common reason for a SIPP to borrow funds is to help support the purchase of a commercial property. However, following the A-Day changes in April 2006, it is now possible to borrow funds for any investment purpose.

The only HMRC restriction is that a maximum of 50% of the net fund value can be borrowed. So, if a client has an investment opportunity, where it is felt that the return on the investment would outweigh the interest and fees charged on the loan, then they could arrange for the SIPP to borrow funds to finance the purchase of the investment.

The borrowing can be from either a normal commercial lender or be from the member themselves or a connected party. If the borrowing is from the member or a connected party then, in order to comply with HMRC regulations, it must be on commercial terms.

Tangible moveable property

Tangible moveable property are things you can touch and move. Examples of these are fine art, antiques, jewellery, fine wines, boats, classic and vintage cars, stamp collections, and rare books. All these attract a substantial tax charge if held within a SIPP.

There is one specific tangible moveable property that HMRC has stated can be held by the SIPP with no tax consequences: investment grade gold bullion in the form of a bar or wafer, of a weight accept by the bullion markets. The member will not be able to hold the gold personally. It must be held in a professional vault for the benefit of their SIPP.

True flexibility

Having provided details of possible investments that can be held within a SIPP, it is important to find a SIPP that meets your client’s need.

For some clients this will mean a SIPP that offers the flexible investment options set out above.

For others, who are not looking to use the full range of investment options, a cost-effective platform-based SIPP that offers access to a wide variety of equities, investment trusts and funds will be sufficient.