Residential Property and Other Tangible Moveable Assets

13 December 2005

Residential Property and Other Tangible Moveable Assets Impact of the Pre-Budget Report

WHY HAS THE GOVERNMENT ANNOUNCED THIS CHANGE?

They want to prevent people from obtaining a personal benefit from pension assets rather than investing in assets for the sole purpose of obtaining an income in retirement.

WHAT ASSETS ARE AFFECTED?

The change affects residential property and other tangible moveable assets (e.g. classic cars, antiques and fine wines). These will be known as “prohibited assets”.

The Government will define in legislation what is meant by “residential property”. This will be of relevance where a property is used for more than one purpose.

DOES THE CHANGE ONLY AFFECT DIRECT INVESTMENT IN THESE ASSETS?

No. The Government has also said that the restriction will also apply to indirect investments that are “a close proxy for direct investment and to other forms of indirect investment that could be used to get around the new rules”.

The legislation will not apply to diverse genuine commercial vehicles that hold residential property (e.g. Real Estate Investment Trusts).

DOES THIS MEAN THAT I CANNOT INVEST IN THESE ASSETS WITHIN A PENSION SCHEME?

Although the legislation will not prevent investment in these assets within a pension scheme the removal of all the associated tax advantages will mean, in practice, there is no benefit to be obtained from holding these assets within a pension scheme. Indeed, there is likely to be a negative benefit as the tax charge on the scheme and the member could amount to 70% of the purchase price of the asset. Income and gains on prohibited assets will be also taxed at 40%.

In addition, if a scheme purchases such an asset it could put at risk the scheme’s registered status.

For these reasons registered pension scheme are unlikely to hold prohibited assets.

WILL THERE BE ANY TRANSITIONAL PROTECTION FROM THE NEW RULES?

There will be very narrow and limited protection available (e.g. where an indirect investment has already been made in a residential property that is not explicitly prohibited under the current rules).

DID THE GOVERNMENT ANNOUNCE ANY OTHER SIGNIFICANT CHANGES IN ITS PRE-BUDGET REPORT?

The Government has also announced that it will take steps to prevent the recycling of tax free lump sums back into pension schemes in order to generate additional tax relief.

WHERE CAN I GET FURTHER INFORMATION?

Further information can be found in HM Revenue & Customs technical note on the Pre-Budget Report:

http://www.hmrc.gov.uk/pbr2005/pensions-simplification.pdf

The detail on how this change will work in practice will only become known when the legislation is published. The information in this e-newsletter is therefore subject to change.