SIPPS - Looking beyond the mainstream

Steve Latto discusses the role esoteric investments can play in a SIPP

Continuing stock market volatility means SIPP investors are looking for other forms of investment that can provide a steady return. Of course, not all SIPP providers allow investment in everything ­permitted within HMRC rules.

Your client's investment options will depend on what flavour of SIPP they have. The majority of SIPPs will fall into one of the following categories:

• Insured SIPP - a proportion of the SIPP's assets may need to be held in the provider's own funds
• Platform SIPP - investment options restricted to the range ­available on the platform
• Full SIPP - almost all permitted investments allowed.

Depending on the investment strategy that you choose for your client, this will dictate which type of SIPP you use and which companies are able to offer that facility to you and your client.

There are more than 100 FSA authorised SIPP providers in the market, but only a much smaller number offer the flexibility to be able to invest in any "SIPP-able" investments. This article will look at some of the more unusual and less common investments in which SIPPs can invest.

Unquoted shares

These are shares that are not quoted on any recognised stock exchange. Since A-Day, SIPPs have been able to invest in the shares of unquoted companies. The onus is on the SIPP provider to consider whether to ­allow certain asset classes.

Indeed, only a handful of SIPP providers will permit unquoted shares within a SIPP. Why is this? As these are not your normal bread and butter investments, each potential transaction into unquoted shares needs to be researched and investigated prior to approval being given. This involves a high level of experience and knowledge in order to be able to achieve this.

Unquoted shares can be ­purchased via a stockbroker or directly from the company and for any new issue of shares it is likely that the SIPP will need to enter into a subscription agreement.

The terms of the agreement must be acceptable to the trustees of the SIPP. It may also be necessary for the SIPP trustee to enter into a shareholder's agreement. If an adviser is not careful when advising a client to purchase unquoted shares they could trigger punitive tax charges on both the SIPP member and scheme administrator if certain regulations are breached.

To avoid any tax charges, there are four trading concern conditions which must be satisfied, these are:

• The company's main activity is the carrying out of a trade, profession or vocation
• The SIPP, either alone or together with "associated persons", does not have control of the company
• Neither the SIPP member nor a person connected to the SIPP member is a director as stipulated by the Income and Corporation Taxes Act 1988 (broadly, 20% controlling directors) of the company or any other company that holds an interest in the company directly or indirectly
• The SIPP does not directly or ­indirectly hold an interest in the company for the purposes of enabling the SIPP member, or a ­connected person of the SIPP member, to occupy or use any "taxable property" held by the company.

There are other conditions to be met, but the above summarises the ones that are most relevant. ­Investing in unquoted shares can be a complex transaction and care needs to be taken when ­recommending and choosing a SIPP provider who offers unquoted shares as an investment option.

Gold

Gold remains a universal finite ­currency, held by every central bank of note in the world. Following soaring prices over the past decade, more and more investors have tried to get exposure to gold - particularly as it is often seen as a hedge against inflation.

Gold can be held in a SIPP but is classed as "tangible moveable property" as it is something that you can touch and move. However, it may not attract punitive tax charges as would normally apply to a holding of "tangible moveable property".

To avoid these tax charges, the gold does have to be of a certain type which is investment grade gold bullion. The definition of investment grade gold is gold of a purity not less than 995 thousandths that is in a form of a bar or a wafer, of a weight accepted by the bullion markets.

Physical gold bullion bars provide balance for two reasons. First, its ­asset qualities are unique when compared to paper assets, and s­econdly gold also tends to rise in value when many of the traditional assets fall in value such as equities.

There is no exemption for other traded metals, such as silver and direct investment in gold of lesser purity as again these are regarded as holdings in tangible ­movable ­property and are subject to ­unauthorised tax charges.

However, indirect investment into commodities such as silver and gold can be made via exchange traded funds (ETFs) which can be purchased via a fund platform. ETFs can offer clients exposure to gold at a much lower minimum purchase level than purchasing gold bullion.

Most full SIPPs will allow you to select a platform of your choice, ­allowing you to select a platform that offers a wide range of ETFs.

Commercial property

Commercial property within the UK or anywhere in the world can be held under a SIPP. This does not just include the normal bricks and mortar acquisitions like offices, shops or industrial units but can also include:

• Land (including farmland)
• Forestry
• Car parks
• Jails
• Golf courses

Even if the SIPP does not have sufficient cash within it to enable a property purchase to be made outright, there are different ways that a purchase could proceed with either the SIPP borrowing funds, by joining with others to make a joint purchase or a combination of both.  

Alternatively, the SIPP could just purchase part of the property with the current owner retaining the balance.

Generally, it is not possible for residential property to be held in a SIPP because it is treated as taxable property by HMRC and therefore subject to tax charges. Taxable property includes ground rent from a residential property under a long leasehold arrangement and the indirect holding of residential property. 

Commercial property within a SIPP can be a useful i­nvestment opportunity, especially for ­business owners. Although there are a number of rules that must be ­followed, SIPP providers can help you to negotiate through these requirements for your client.

Borrowing

This would normally go hand in hand with purchasing commercial property, as the SIPP can borrow up to 50% of the net asset value of the SIPP at the point prior to the property being purchased. This can enable the SIPP to invest in a property that is valued much higher than the value of the SIPP.

Some SIPP providers restrict borrowing to commercial property purchases only, but there are no HMRC restrictions as to what the borrowing can be for, as long as it is a permitted HMRC investment.

For example, borrowing could be taken out to assist in the purchase of shares in a particular company where there may be a restriction on the minimum amount to be purchased and there are insufficient funds to make the purchase at that level. Borrowing funds from a lender can help.

However, the lender may place ­restrictions on what the ­borrowing can be used for as the proposed ­investment may be used as security for the loan. Each individual lender will be different and only permit ­borrowing in certain circumstances.

Third-party loans

SIPPs do not have a principal employer to whom they can make a loan. But they are able to make loans to third parties who are not c­onnected to the SIPP member.

A loan can be made by the SIPP with or without security but whether security is taken may depend on the potential risk of making that loan.

There is no HMRC restriction on the amount of a SIPP that can be used for this purpose. But as HMRC requires that any loans made to ­unconnected third parties are prudent and made on commercial terms, some SIPP providers may only allow a proportion of the net value of any SIPP to be invested in loans to third parties. 

To comply with the HMRC ­requirement, all loans must be on commercial terms. Unsecured loans are likely to attract a higher interest rate than secured ones.

Conclusion

Many investors are disappointed with the current market volatility and general uncertainty ­surrounding traditional asset classes such as ­equities. Advisers are ­continually seeking better returns for their clients and esoteric investments are becoming more popular as advisers seek to achieve this aim.

The role of the adviser is more important now than ever due to the vast range of investments that a SIPP can invest in. Some of these esoteric investments offer the potential for huge gains, but equal consideration should be given to the risks of investing in these types of investments.

Ultimately, advisers need to ­understand their client's circumstances and personal objectives, coupled with a SIPP provider that understands all the issues surrounding these types of investment.

Steve Latto is head of pensions at Alliance Trust