Last month the Scottish Government set out on the path towards another referendum on independence with “fairness, transparency and propriety” lauded as being fundamental to any plans. While I have no interest in being drawn into the independence debate, I do have a keen interest in the actions of any aspiring independent government that impact the Self-Invested Personal Pension (SIPP) market.
In April 2015, the Land and Building Transaction Tax (LBTT) replaced Stamp Duty Land Tax (SDLT) in Scotland. The change was broadly welcomed, moving from a slab tax approach, with the whole of the price taxed at the same rate, to a progressive tax approach, with slices of the price charged at different rates. Consequently, most SIPP investors have made a tax saving when purchasing commercial property via their SIPPs. Only those commercial property transactions with a value of £2 million and above will lead to higher tax when compared to the old SDLT basis.
But while rates and thresholds may have changed under LBTT, it is still on a par with the SDLT regime. Both regimes follow the same principles, where the presence of the acquisition of chargeable interest and chargeable consideration determine if the tax is due. In fact, the relevant section of the LBTT legislation simply replicates, word for word, the existing SDLT provisions.
As such, it has come as both a surprise and a frustration to many in the SIPP market that Revenue Scotland has taken a contrarian view to HMRC’s long-established practice and concluded that SIPP transfers involving commercial property will give rise to LBTT. Effectively this means that SIPP transfers involving property north of the border are inconsistent with others in the rest of the UK.
Consequently, both Scottish-based SIPP clients and providers are now adversely affected. Clients face an additional transaction cost if they wish to change their pension provider and providers are seeing a transfer market eroded. This latter point seems especially counterintuitive at a time when the Scottish Government is promoting an independence referendum to protect economic interests.
A tax on switching provider within the SIPP market also seems out of kilter with the broader consumer protection ethos within the wider financial services industry. For example, consumers do not face taxes to switch current accounts, so why should pension savers?
But I am not insensitive to the wider economic situation. Public service revenue not only continues to exceed receipts, but the budget balance (including the North Sea) has worsened per the Government Expenditure and Revenue Scotland 2015/16 report. Against this backdrop, new or increased taxes are to be expected, but not by stealth and certainly not through retaxing. This is now the case because the tax would already have been applied at the point of the property purchase.
As often happens, the timing could not have been worse. Traditionally, pension savers have not tended to transfer investments in commercial property due to the complexity and additional costs involved. But recently there has been an uplift in the number of property transfers between SIPP providers. Some providers have been willing to offer fee concessions, designed to offset some of the transfer cost, in a bid to make such a switch more palatable. Others have partnered with legal firms to streamline the conveyancing and fix legal costs benefiting from economies of scale, while some clients have simply tired of poor service and deemed the cost of transfer (without LBTT) as a worthwhile expense.
But with the goal posts shifting overnight, this secondary market has ground to a halt. We are, however, hopeful that the position can be reversed, given the strength of feeling among providers. Let’s hope that with 2017 just around the corner, fairness, transparency and propriety will truly be applied, regardless of whether a devolved government or a new fully independent one emerges.
Eddie McGuire is managing director of @sipp
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