Shares-to-Sipp route is blocked for many

Some of the UK’s leading pension providers are no longer permitting customers to move stocks and shares into self-invested personal pensions (Sipps) because of increased scrutiny of these sorts of transfers by the tax man.

In a quiet reversal of policy, Suffolk Life, Hargreaves Lansdown and a few other Sipp providers have opted to scrap certain types of transfers of stocks and shares into pensions, at least temporarily, after concerns about the precision of the valuations of these transfers on the part of HM Revenue & Customs.

“The HMRC had concerns about the way these transfers were being handled and the way these contributions are expressed, so we stopped agreeing to handle them temporarily in order to keep them happy,” said Tom McPhail, spokesman for Hargreaves Lansdown.

The transfer of share portfolios into a Sipp or a Small Self-Administered Scheme (Ssas) is considered a so-called “in-specie” pension contribution. For high-earners who have control over a range of assets, these contributions are particularly enticing as they permit the passing of non-cash assets such as commercial property and equities into tax-protected pensions.

“In-specie” contributions have gained popularity thanks to changes to pension laws last year, which have given high earners greater opportunity to enjoy tax relief of up to 40 per cent by piling assets and cash into their Sipps.

Under the new “A-day” regime, individuals can pay their gross salaries straight into their pension to a maximum of £225,000 per annum in the current tax year.

Contributions can also be accepted from employees, employers, the self-employed, and (subject to a maximum of £3,600) those who have no relevant earnings.

The HMRC, however, has expressed concerns about whether providers are properly reporting the precise value of these assets when they transfer them to pensions. Fluctuations in the price of stocks and shares from one day to the next make it difficult to assign a value to the contribution. And even though the valuation of assets such as commercial property can be slightly easier, since such assets are relatively illiquid, room for uncertainty remains.

The concern for providers who have sanctioned such in-specie transfers in the past is that the Revenue could call into question their awarding of tax relief on these transfers, which could pose problems for high net worth clients nearing contribution limits. “Anyone who has paid a Sipp contribution in shares might want to get confirmation from a Sipp provider that all was done in accordance with the recognised process,” says Andy Bell of the Sipp provider AJ Bell.

Other pension providers such as The Pal Partnership remain less concerned about the HMRC’s renewed interest in these transfers and continue to offer them.

To make matters less fuzzy, HM Revenue & Customs recently clarified the rules on in-specie contributions and some providers are taking the opportunity to remind clients.

As it stands, the rules state that the specific amount of the contribution in either net or gross terms must be decided on before the transaction takes place. One cannot simply list the contribution as “the value of these shares”, for example.

Once the provider has been alerted to the amount of the contribution, it creates a “legally binding” debt which the pension scheme is required to collect. Assets must be valued at their so-called “open-market” value and a qualified adviser must submit the valuation to the pension company. For quoted assets, the value is the quoted value of the stock or share on the day after assets have been transferred. Tax relief cannot be claimed until after assets have been transferred completely. Also, cash payments must be used to top-up “in-specie” contributions. If assets exceed the limit on tax contributions, one permissible option is to transfer them back to the original shareowner’s name.

AJ Bell only handles in-specie contributions involving property. Andy Bell says one of the reasons in specie contributions became popular is that they allow prospective pensioners to avoid incurring costs related to converting their assets into cash and also potentially realise bigger returns on their investments. However, these transfers are still subject to stamp duty and possibly capital gains tax.

Bell is one of a number of advisers who think an attractive alternative to transferring share portfolios this way is to engage in what is popularly known in the trade as “bed-and-Sipping”.

In simple terms, this means switching investments you have outside your pension into the tax-efficient wrapper by selling your shares and buying them back from a sanctioned pension account immediately. The risk, of course, is that prices will move against you during the period when you are out of the market. Also, dealing costs can be high and investors could lose up to 2 per cent on a buy-sell. But one benefit is some providers such as Hargreaves Lansdown allow investors to buy and sell at exactly the same price with many popular funds.

“Bed-and-Sipping avoids the short-term complications with the HMRC,” says McPhail of Hargreaves Lansdown.