If you go ahead and use your pension to self invest into unlisted shares or property and fall foul of the rules then the penalties are very severe. The tax charges imposed upon you and the pension are, put bluntly, horrific.
You need to make sure you do not impinge on the rules.
There are some rules which may cause an obvious problem:
- Avoid any investment into residential property. This is the biggest no-go; even a small element of residential property can cause a problem, so for example if you buy a commercial building which has a small flat within it (e.g. a flat above a shop) this could pose a problem.
- Make sure all transactions are on an arms length basis. This is not always clear or easy to understand but in essence your pension fund should not buy something for more than it is worth or less than it is worth. If you own a com-mercial building, for example, and sell it to your own pension fund for £250,000, when it is really worth £500,000 you will be in trouble!
- Make sure you don’t invest your fund directly or indirectly in “taxable property.” Taxable property basically means anything that is movable OR depreciates. Think of anything you might want to use your pension fund to buy and if you can move it, it will fail on the taxable property definition! Common examples are: works of art, racehorses, furniture, cars etc.
- Don’t extract personal value from the pension. There may be ways that you can invest your pension fund which is perfectly within the rules but you get some form of personal benefit. If this occurs you may well fall foul of the rules which say that you cannot extract personal value from your pension.
But there are also rules which may be less obvious but will still cause a problem and this is where professional advice is so important.
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