DBS

44 SIPPS AND ISAS SIPPS Alternative finance investments are SIPP acceptable for tax purposes provided they meet the rules concerning taxable property, unauthorised payments and trading. If they do not meet the rules, they are subject to a tax charge. Taxable property consists of residential property (including residential ground rents, timeshare/ holiday homes and the grounds of residential properties) and tangible moveable property – anything that a person can touch and move potentially falls into the tangible moveable property category. In addition, the scheme member and connected parties must not derive any personal use or enjoyment from the property. The rules also preclude any payments in kind or ‘rewards’ for an investment (these would be considered personal use). This makes DBS which offer payment in kind as well as by cash, potentially problematic from a SIPP perspective, although, if the investor rejects the payment in kind, e.g. a pub loyalty card, this issue can be avoided. The FCA published a list of standard assets in its Quarterly Consultation No.9 June 2015, CP15/19, in which corporate bonds are not included. However, ‘Securities admitted to trading on a regulated venue’ are. Since there is no definition of a regulated venue, there is little clarity here, but in January 2017, the FCA reiterated its key criteria that, “a standard asset must appear on the list of standard assets, and must be capable of being accurately and fairly valued on an ongoing basis and readily realised within 30 days, whenever required” 89 . It further suggests that, if the answer to the following question is ‘no’, the asset is likely to be non- standard: In the absence of systematic internalisers (‘market makers’) on a particular venue, is there a guarantee that securities can be sold at a particular price – or any price? 90 Since valuation of DBS is challenging and there are no guarantees of 30- day liquidity, even where matched bargain services are available, the majority of SIPP providers judge DBS to be non-standard assets. This does not prevent the SIPP provider from holding the DBS within its SIPP, but is likely to attract more regulatory scrutiny from the FCA and HMRC and also require the SIPP provider to make more capital provision to offset the perceived risks associated with the investment. Subsequently, advisers need to recognise that SIPP operators may not be queueing up to accept DBS into their schemes, although getting a DBS investment into a SIPP is easier than a P2P loan. This is because of the ‘connected parties’ rule which prohibits connected individuals benefitting from tax breaks by transferring assets to each other; the sheer numbers of investors who can be involved in P2P loans makes this difficult to verify. If the SIPP lends money to a person connected with a member or ex-member of the pension scheme, an unauthorised payment occurs. It might be easy to check whether a borrower is connected to the SIPP member but it is less straightforward when the test is applied to all, say, 80,000 members 91 of the same scheme or anyone connected to them. This could make DBS with only one underlying investment easier to administer within a SIPP (giving SIPP operators greater comfort) than one where multiple assets and entities are loaned the funds generated by the DBS. That said, the Tax Incentivised Savings Association, (TISA) has been lobbying in an effort to have P2P loans and DBS included in the standard asset list. Advisers should also bear in mind that crowdfunded DBS are eligible for the Personal Savings Allowance (PSA), which allows investors to protect their portfolio from tax even if they invest outside a pension or ISA 92 ; the PSA permits basic rate tax payers to receive £1,000 savings income per year tax-free; or £500 for higher-rate taxpayers. ISAS The Innovative Finance ISA gives DBS investors access to a tax wrapper for the first time. This wrapper means that income or gains from an IFISA held investment do not have to be declared on investors’ tax returns – as they are not eligible for CGT or income tax. However, according to the Government, crowdfunded equities are too risky and potentially volatile to allow into an ISA. But it has said that allowing DBS into an ISA, “will increase the choice available to ISA investors, encourage the growth of crowdfunding and may improve competition in the banking sector by diversifying the available sources of finance” 93 . This means investors can in theory split their annual ISA allowance – which for the 2017/18 tax year is £20,000 – across three categories: Cash, Stocks and Shares, and Innovative Finance. They could also transfer their existing cash and stocks-and-shares ISAs into an IFISA, and if using an aggregator, can hold DBS across multiple platforms in the aggregators IFISA. Firms like Abundance, Downing Crowd, Goji, Property Crowd and Triple Point Advancr have already set up their own IFISAs (having obtained the required FCA authorisations) and are holding debt based securities within them. In fact, Abundance has already seen more than 2,100 people opening an IFISA, with more than £12 million committed to those accounts 94 . “Private company loans offer a new avenue for tax-efficient investing, especially for clients with SIPPs, SSASs and investment companies.” – Matt Taylor, Rockpool