Investors in a failed property scheme have been told they could face a hefty tax charge if they attempt to sell their assets to exit their Sipp.
Sipp provider Alltrust has warned investors in oversees hotel development The Resort Group they could face tax charges of up to 40 per cent if they sell their investments at a price HMRC deems ‘undervalued’.
The issue affects owners of assets deemed worthless but which continue to rack up fees on their Sipp wrappers despite no realistic prospect of the pension ever paying out. The Sipps cannot be closed as long as the asset is still in it.
Many of the investors have already recouped losses through claims with the Financial Services Compensation Scheme, which has told them it does not intend to pursue any recoveries in respect of their assets — fractional ownership shares in hotel rooms — leaving them free to dispose of them.
But in a letter to investor Andrew Walton dated February 20, Alltrust said his asset was particularly difficult to value and warned that any transaction had to be supported by an independent market valuation.
It wrote: “We understand that some members are exploring the sale, surrender, or other arrangements under which assets similar to yours would leave the Sipp.
“If an asset held within a Sipp is transferred, surrendered or otherwise disposed of for less than market value, HMRC has the power to impose significant tax charges and penalties on both members and Alltrust, based on the value HMRC considers should apply to the asset.”
Alltrust, which acquired the Sipp book from failed pension giant Rowanmoor in early 2023, said it had asked HMRC for guidance on the matter but the tax office refused to engage.
Lawyers and accountants told FT Adviser the taxman could seek to levy the unauthorised payments and scheme sanction charges.
This could be as much as 40 per cent of the unauthorised payment on the investor alongside 40 per cent on the Sipp provider, though this can be reduced to 15 per cent in practice if the former charge is settled.
The two charges arise when the payment is not classified as authorised under the Finance Act 2004, said RSM UK.
A spokesperson for the accountancy firm explained this could arise in a few ways: in relation to payments made before the age 55, when lump sum limits have been exceeded, when payments are made after the member’s death, or where a transaction with a member is not on an arm’s length basis, as could be the case with Walton’s pension.
And even if these rules do not apply, the charges could still be levied under the value shifting provisions, which triggers the same two charges if value moves from the Sipp to the saver without a corresponding arm’s-length payment.
Steven Porter, head of tax disputes & investigations at Addleshaw Goddard, agreed if the investor was younger than 55 – the age at which they are allowed to draw from their pension – the taxman was likely to seek the unauthorised payment and scheme sanction charges based on his age.
But he deemed it unlikely that HMRC would seek to levy the two charges on an investor of pensionable age if he has not received any benefit from selling the asset.
Had he sold the asset for more than the scheme released it for, meaning he realised a benefit, the taxman would expect the saver to file a tax return and pay their marginal rate of tax on the earnings, Porter said.
He said: “In principle, the intention behind these charges is that they remove the tax relief of the monies being contributed to the pension in the first place although of course, the rules are complex so (some would say) unfair outcomes can arise.”
He added: “By contrast, if the Sipp disposes of the asset to an unconnected third party, it is difficult to see how this could be characterised as a transaction at an undervalue. In those circumstances, the unauthorised payment tax charges should not arise.”
Walton has received £33,700 from the FSCS to cover the loss from his investment and some of his Sipp fees to date.
But he struggles to understand why he has been unable to close his Sipp despite repeatedly pleading with Alltrust to let him do so.
“Rowanmoor and now Alltrust are forcing me to remain in a Sipp that I was officially mis-sold, which I find stressful and extremely frustrating,” he said.
“The Sipp asset was mis-sold to me in the first place and Rowanmoor had a duty of care they did not uphold in the process.”
Alltrust has agreed to waive its Sipp fees for Walton for now. It said it was working closely with its advisers to find a way to support members who hold TRG assets in their Sipps.
A spokesperson for Alltrust said: “We are working to ensure that any disposal of TRG assets from members’ pension arrangements are carried out in a way that complies with all relevant laws and regulatory requirements and does not result in any unintended tax or other financial consequences for members.
“This matter is being treated as a priority by Alltrust and we are working hard to find a solution that will allow members to dispose of TRG assets as soon as possible”
But Walton is sceptical of the firm’s commitment to keeping his costs down over the long term as well as the prospect of finding a suitable buyer.
“I cannot see this continuing to be the case in the future as there are thousands of people like me in the same boat and the administration of the Sipp is costing Alltrust money, which I would be surprised they would not try and get back,” he said.
“No one in their right mind would buy a 1/8 fractional in Dunas Beach Apartment 107 Limited given what everyone now knows about these fractionals and TRG.
“At best I would just like Alltrust to release me from this nightmare, which I think given the circumstances they really should without charging me any additional fees to do so. At worst, if I could I would sell the ‘asset’ for £1.”
carmen.reichman@ft.com