IML offers services related to the setup, management, and operation of the IM SIPP, a self-invested personal pension plan.
Up until 2014, IML registered for VAT on the services it rendered to SIPP members. IML, however, asserted that the services qualified as “insurance transactions” under item 1 Group 2 Schedule 9 of the VATA 1994, which exempted them from VAT and entitled it to a refund of VAT.
The UT and the FTT reached a consensus that, according to the CJEU case law, the following characteristics of an “insurance transaction” are necessary for VAT purposes: the insurer agrees to provide the insured with the service that was agreed upon at the time of contract conclusion in the event that the covered risk materializes, in exchange for the insured’s prior payment of a premium.
The UT also concurred that the insured party’s contractual relationship with the insurer provides the insured with some protection from the pertinent risk or uncertainty, which is a necessary implication of the essential features of an insurance transaction. When that risk or uncertainty materializes, someone other than the insured party is required to pay the relevant amount or provide the necessary service.
After applying these standards to the case’s facts, the UT concluded that IML’s supplies for the IML SIPP’s provision did not qualify for the VAT exemption for insurance transactions. The UT dismissed IML’s claims that the yearly dues and other expenses borne by IML SIPP participants, along with a portion of their fund contributions, represented “premiums” for the provision of life and death benefits under the plan.
The UT also made a comment regarding the fact that the FTT in Winterthur (LON/96/1787), a case with comparable facts to the current one, reached a different decision. The UT came to the conclusion that subsequent CJEU rulings demonstrated the incorrectness of the Winterthur ruling.
The UTs ruling affirms that the domestic non-VAT case law on the definition of insurance is not decisive for this purpose and that the VAT exemption for insurance transactions is to be interpreted strictly and in line with the CJEU case law.
For many years, the VAT treatment of pensions and life insurance has been a contentious issue. It has also gained significant attention in conversations about HM Treasury’s ongoing fund management VAT consultation. Even though it doesn’t seem like this ruling will have a big impact on that consultation alone, the number of times courts and tribunals have been asked to decide how to treat certain products in terms of VAT highlights the importance of having fair competition regulated by precise laws.
Do you pay VAT in a SIPP?
This is a common question for those considering purchasing property through their Self-Invested Personal Pension (SIPP) or Small Self-Administered Scheme (SSAS). While VAT is often overlooked in the property purchase process, it can significantly impact your investment. This guide will help you understand the VAT implications of SIPP/SSAS property purchases and how to navigate them effectively.
Understanding VAT and SIPP/SSAS Property Purchases
VAT (Value Added Tax) is a consumption tax levied on most goods and services in the UK. The standard VAT rate is 20%, which means that the purchase price of a property will be subject to an additional 20% VAT. However, there are certain exemptions and reliefs that may apply to SIPP/SSAS property purchases, which we will explore in detail.
Key Considerations for SIPP/SSAS Property Purchases and VAT:
- VAT Status of the Property: The first step is to determine the VAT status of the property you are considering purchasing. This information can be obtained from the vendor, their agent, or solicitor. If the property is “elected for VAT,” meaning it is part of the VAT system, VAT will be charged on the purchase price.
- Transfer of a Going Concern (TOGC): If the property is transferred as a going concern, meaning the business of leasing the property continues without interruption, VAT may not be payable on the purchase price. This requires specific conditions to be met, including the presence of a tenant with a lease before and after the SIPP/SSAS purchase.
- VAT Registration and Opting to Tax: If the TOGC exemption does not apply and VAT is payable on the purchase price, the SIPP/SSAS trustees must register for VAT and opt to tax the property. This allows them to reclaim the VAT paid on the purchase price from HMRC.
- SDLT/LBTT Implications: Stamp Duty Land Tax (SDLT) or Land and Buildings Transaction Tax (LBTT) in Scotland is calculated on the purchase price plus VAT. Therefore, the presence of VAT can significantly increase the SDLT/LBTT liability.
- Specialist Advice: Due to the complexities involved, seeking advice from a specialist VAT advisor and a SIPP/SSAS provider is crucial. They can guide you through the process, ensure compliance with regulations, and help you optimize your investment strategy.
Benefits of SIPP/SSAS Property Purchases:
- Tax-Free Income: Rental income received by the SIPP/SSAS is tax-free, providing a steady stream of income for your retirement.
- Capital Growth: The property value can appreciate over time, offering potential capital gains that are also tax-free within the SIPP/SSAS.
- Control and Flexibility: You have greater control over the property investment compared to traditional pension investments.
While VAT can be a significant factor in SIPP/SSAS property purchases, careful planning and expert advice can help you navigate the complexities and achieve your investment goals. By understanding the VAT implications and utilizing available exemptions and reliefs, you can make informed decisions and maximize the benefits of this investment strategy.
Additional Resources:
- Professional Paraplanner: SIPP/SSAS property purchase and VAT (https://professionalparaplanner.co.uk/techzone/sipp-ssas-property-purchase-and-vat/)
- Simmons & Simmons: Fees paid to SIPP administrator not VAT-exempt (https://www.simmons-simmons.com/en/publications/cl38rpaa21az20a22xvffcvhp/fees-paid-to-sipp-administrator-not-vat-exempt)
Disclaimer: This information is for general guidance only and should not be considered professional financial advice. It is essential to consult with a qualified financial advisor and a VAT specialist for personalized advice tailored to your specific circumstances.
The UT also made a comment regarding the fact that the FTT in Winterthur (LON/96/1787), a case with comparable facts to the current one, reached a different decision. The UT came to the conclusion that subsequent CJEU rulings demonstrated the incorrectness of the Winterthur ruling.
The UTs ruling affirms that the domestic non-VAT case law on the definition of insurance is not decisive for this purpose and that the VAT exemption for insurance transactions is to be interpreted strictly and in line with the CJEU case law.
For many years, the VAT treatment of pensions and life insurance has been a contentious issue. It has also gained significant attention in conversations about HM Treasury’s ongoing fund management VAT consultation. Even though it doesn’t seem like this ruling will have a big impact on that consultation alone, the number of times courts and tribunals have been asked to decide how to treat certain products in terms of VAT highlights the importance of having fair competition regulated by precise laws.
After applying these standards to the case’s facts, the UT concluded that IML’s supplies for the IML SIPP’s provision did not qualify for the VAT exemption for insurance transactions. The UT dismissed IML’s claims that the yearly dues and other expenses borne by IML SIPP participants, along with a portion of their fund contributions, represented “premiums” for the provision of life and death benefits under the plan.
The UT also concurred that the insured party’s contractual relationship with the insurer provides the insured with some protection from the pertinent risk or uncertainty, which is a necessary implication of the essential features of an insurance transaction. When that risk or uncertainty materializes, someone other than the insured party is required to pay the relevant amount or provide the necessary service.
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But in certain cases, even if a property is designated for VAT, VAT may not be due on the purchase price; therefore, the client should always seek and obtain expert VAT advice.
Each property is different, and even if the SIPP / SSAS provider finds the property acceptable in theory, it is crucial to make sure the funding structure functions as intended. This means that it must be evident how the purchase price and all related acquisition costs will be covered. If there is a funding structure shortfall, it may prevent the transaction from happening, which would prevent the client’s goal from being accomplished and possibly result in a significant amount of time being lost in the process.
There are a variety of reasons for this, and the specific circumstances of each client will determine why they are making an investment of this kind. The reasons could include long-term capital growth in the value of the property (which will be exempt from corporation tax and capital gains tax upon eventual disposal by the pension scheme) or a steady (and frequently increasing) stream of tax-free income to the pension scheme. At some point in their careers, paraplanners may receive a property purchase inquiry from a client, for whatever reason.
At this point, it is important to remember that any SDLT or LBTT liability is calculated using the purchase price PLUS VAT. The SDLT and LBTT liabilities in the aforementioned example would be determined using a £600,000 purchase price.
How to claim pension tax back on your SIPP
FAQ
Is a SIPP taxable?
How does a SIPP pay out?
Is a SIPP the same as a PPR?
Are SIPP contributions net or gross?
Do I have to pay VAT if I buy a SIPP?
Where this is the case 20% must be added onto the purchase price when building your funding calculations. This can be reclaimed following the purchase by registering the SIPP for VAT. However, provision must be made to pay the VAT at the time of purchase. Remember, that stamp duty is also payable on the VAT element too.
Can a SIPP or SSAs register for VAT?
Andrew Needham explains that a SIPP or SSAS that purchases property can register for VAT and recover the VAT on related costs.
Do you get tax relief on SIPP contributions?
You’ll receive tax relief on your SIPP contributions up to your annual allowance. For example, if you earn £50,000 per year, you can contribute up to £50,000 to your SIPP and receive tax relief on the full amount. The government provides tax relief on SIPP contributions at your marginal tax rate, as follows:
Can a SIPP reclaim VAT if a property is sold?
The SIPP is able to reclaim the VAT payable on the purchase. No Capital Gains Tax liability if/when asset sold within the pension. David’s company receives £200,000 (net of VAT) which they can use to aid their expansion. The property is now off the company’s books and generally would be outside of the reach of creditors.