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The likelihood that Commercial Properties will need to achieve an Energy Efficiency ‘C’ rating by 2027 (‘B’ by 2030) means the general move to more environmentally conscious investment and cost savings, the use of Solar Arrays, Heat Pumps, EV Chargers and Wind Turbines (“Energy Generating Assets”) will become a key plank in freeholders achieving energy efficient buildings.
However, when it comes to Small Self-Administered Schemes (SSAS) there appears to be some confusion among Professional Trustees as to whether Energy Efficient assets are or will be determined to be taxable assets by HMRC.
In this note we seek to add some clarity to HMRC’s likely treatment of Energy Generating Assets so that Professional Trustees can go forward with confidence to both ensure the commercial properties owned in their Schemes can continue to be leased in 2027 and so they can shape their own green policies for their new Schemes now and in the future.
Tangible Movable Property acquired by a SSAS – General Rule:
Tangible movable property held in an investment regulated pension scheme (Finance Act 2004, Sch 29A Part 1 ss. (1) and (2)), which includes SSASs, are taxable assets. The acquisition of tangible movable property by SSAS “will create an unauthorised payment on the member whose arrangement acquires the asset. In addition the scheme administrator will be liable to a scheme sanction charge both on income or deemed income from the taxable assets and capital gains on their disposal. (Pensions Tax Manual 125100)”
In effect, that means that SSASs (and SIPPs) should not hold tangible movable property and all Professional Trustees should exclude it as an allowable investment.
Tangible Movable Property
The definition of tangible movable property is set out in Pensions Tax Manual 125100 as “things that can be touched and that are moveable rather than immovable property. It includes assets such as art, antiques, classic cars and also plant and machinery owned by a registered pension scheme (Pensions Tax Manual 125100).”
It’s reasonably clear from HMRC’s guidance that the restriction on SSASs holding tangible movable property is to restrict the acquisition of assets into a SSAS that a) is difficult to value by the SSAS from time to time; and b) that the SSAS cannot restrict the sale of and cannot control the use by a member or members.
Acquiring and Holding Tangible Movable Property
A scheme can acquire tangible movable property either directly or indirectly by:
(a) by act of the parties to a transaction
(b) by order of a court or other authority
(c) by or under any statutory provision
(d) by operation of law
(Finance Act 2004, Sch 29A Part 3 ss 1 (1) and 1 (2)).
A scheme is also prohibited from acquiring or holding an indirect interest in tangible movable property. For the purposes and limitation of this note, that would include, for example, owning shareholding in a company that holds tangible movable property. There is an exception to that rule where main activity of the vehicle in which the shareholding is owned is the carrying on of a trade, profession or vocation (Finance Act 2004, Sch 29A Part 3 ss 20 (1) and 21), although that exception is subject to certain conditions.
So, the rule is fairly comprehensive – Tangible movable property held in an investment regulated pension scheme are, for all intents and purposes, taxable assets.
Meaning of Tangible Movable Property
HMRC’s guidance on what constitutes tangible movable property isn’t comprehensive as per the definition noted above. The questions are:
a) Can the property be touched? If so,
b) Is the property movable?
Both of these are questions of fact that can be decided on a case-by-case basis. Whether something is tangible is easy to establish, but what about whether something is movable? That’s potentially a trickier question that we’ll endeavour to shed some light here:
When deciding on the interpretation of ‘movable’ the following wording from HMRC’s Pensions Tax Manual 125100 is important:
“If an asset has not become part of the land or any building to which it is attached, then it retains its separate identity. If, however, it is permanently or semi-permanently attached to the land or any building to fulfil a function as part of the building, it is regarded as part of that land or building” (emphasis added).
So we can add a layer of interpretation to the definition of ‘movable’ in that it must be permanently or semi-permanently attached to a building. One might argue that a central heating boiler is tangible and ‘movable’ given the limited damage caused from removing (and replacing) it. The same could be said of radiators. Or even, if we were going to stoop to reductio ad absurdum, door handles. Nobody would argue that central heating boilers or door handles are taxable property. Indeed, they’re both:
1. Semi permanently attached; and
2. Fulfil a function as part of the building
Fixtures v. Chattels
When looking at whether an asset is tangible and ‘movable’ it’s useful to draw analogies with the case-law that’s determined what are fixtures and what are merely chattels. Much like HMRC’s guidance in Pensions Tax Manual 125100 the courts have provided a two stage test as to whether something is a fixture:
1. What is the level of annexure; and
2. What is the purpose of the asset? (Elitestone v Morris [1997] 2 All ER 513)
The case law on the level of annexure has been ongoing since the 19th Century and in respect of produced mixed results, the courts struggling to provide solid rules for the level of annexure to a building for something to be considered a fixture. What can be said is that there must be some level of attachment to the building and that attachment must give rise to some damage to the building if it is removed. In many cases brought to determine the fixture v. chattel question, the level of annexure of being bolted to the building has been sufficient (trade counters, seats in a cinema) whereas items that are merely connected to the building by way of service media, for example, but without being otherwise attached have been treated as chattels (white goods, heavy plant that rests on the floor without being bolted down).
The latter test of purpose is informative as the subjective element as to the reason an asset is attached to a building is material in deciding whether that asset is ‘movable’ or not. Take, again, the example of a central heating boiler. While one might argue that the boiler is tangible and has a low level of annexation to a building as it can be removed without causing particular damage to a building (although it will cause some damage), the fact remains that removing a gas boiler would mean the building would no longer have heating. The boiler is a material, integral part of the building not due to its attachment to the building but due to the purpose it serves in the building – it is the source of heating and hot water. As this case law progresses it is this test that is likely to be the determining factor in fringe cases where an asset can be removed without causing material damage to a building rather than how much damage an asset would cause on its removal.
Interpretation Pensions Tax Manual 125100 and of Case Law
We draw our attention now to the purpose of this investigation: energy efficient technologies owned by SSASs. Investment regulated pension schemes such as SSASs hold substantial amounts of commercial property and there’s the potential that, to be lawfully let, commercial buildings will need to meet a ‘C’ Energy Efficiency rating by 2027.
Out of the myriad improvements that can be made to a building to make it more energy efficient, some of the most powerful relate to energy generation, in particular Ground Source Heat Pumps, Solar Arrays, and Wind Turbines. There are also EV Charging points to consider.
One might argue that none of these energy efficiency improvements are permanent fixtures that form part of the fabric of the building: heat pumps are affixed to the floor and existing pipes in the building, but are otherwise stand-alone; solar arrays are attached to the roof via a bracket; EV Charging is either affixed by concrete in the ground (if they’re large) or screwed to the wall if they’re small); wind turbines are either attached to the roof or stand-alone concrete based. But, in each case they are attached to the building, or estate on which they’re sited.
Considering HMRC’s own guidance, it’s difficult to make an argument that any of these assets are not semi-permanently attached, then. From a purely practical point of view they are as semi-permanently attached as other assets of a building that we’d usually consider integral. A gas boiler, for example, has a likely lifespan of 10 years. A solar array would likely last at least that long too. Both, then, are semi-permanently attached.
Turning to the second question of the purpose of the asset. For some assets that the purpose is integral to the building is without question: a heat pump is the building’s heating system; a solar array or a wind turbine is a building’s energy supply. On that basis would it be reasonably to state that the purpose of these assets means they’re integral to the building? We believe so.
Of less certainty is a Electric Vehicle Charger that, while will certainly be semi-permanently attached to the land, doesn’t ostensibly have a purpose that’s associated with the building or its use. The question whether EVCs are movable property may turn on the ubiquity of EVCs at any one time. HMRC would struggle to argue that an EVC is a movable asset if it is attached to the building (or estate) and fulfils a function that is ubiquitous in commercial buildings as EVCs become more and more common, although at this point we don’t think the case is as strong for EVCs as it is for Solar Panels, Heat Pumps and Wind Turbines that exclusively supply the property.
Energy Generation – Contractual Considerations
When entering into arrangements with companies that provide Solar Panels, EV Chargers, Wind Turbines and Heat Pumps, Professional Trustees will need to have account of the contractual considerations and legal mechanism for both the legal interest the provider is obtaining in the property and the nature of the commercial contracts being entered into.
To avoid complication and repetition we’ll treat all energy generating assets with the same term being ‘EGAs’. What we’ve provided below is vey general to give an indication of what Professional Trustees should have account of, and each agreement must be taken on a case-by-case basis.
Usually Solar Panel, Wind Turbine and EV providers will require a lease to be granted over the building or the estate so that the asset can be sited within that demise. That lease will also include rights for the EGA provider to carry out works, repairs, to lay service and connect into service media etc. and will also include rights reserved to the freeholder for any repair, maintenance etc. of, say, a roof or service media that crosses the leased land. EGA leases can be quite long and Professional Trustees should be conscious of a) the future plans for the Property – is it going to be sold, developed? and b) the impact that the EGA will have on those plans.
When it comes to the commercial contracts, there are, in general, two types:
1. Where the EGA provider supplies all the equipment, installation, etc. at their own cost;
or
2. Where the freeholder buys the equipment and the EGA provider installs it for them.
Where the EGA Provider Supplies and pays for the Equipment
Where the EGA provider supplies the equipment at their own cost, it’s usually the case that the commercial arrangement is that EGA supplies the energy to the property for which the freeholder receives energy prices that are cheaper than are available on the energy market. Professional Trustees should be aware that in many of these arrangements the freeholder is required to use a certain amount of energy, as agreed and included in the contract.
If the freeholder does not use the requisite amount of energy then they’re required to pay for the unused energy up to the agreed minimum usage amount. This may cause problems where a SSAS owned commercial property sits empty for some time and Professional Trustees should be aware of that pitfall when advising Members on the benefits of EGA.
Where the EGA Provider Supplies the Equipment but Freeholder Pays
Where the Freeholder purchases the equipment the usual position is that the Freeholder can receive a payment from the Provider for any generation of electricity over and above the amount used by the Freeholder. That may well be considered to be taxable income by HMRC and our present position is that this arrangement should be avoided by Professional Trustees. This is, however, something we’re researching to see whether the nature of the asset is one that could be determined to be outside the scope of taxable income for a Member Directed Pension Scheme.
So, at present, the general position is that as long as the scheme isn’t receiving income then the usual commercial arrangements for supply of energy from an EGA should be fine.
Income from EGAs is something we’re researching further and we will seek to provide further information on this soon.
Conclusion
This note is an examination and our opinion on the treatment of EGAs acquired by or held in a SSAS. We are of the opinion that it cannot have been HMRC’s intention for all EGAs to be deemed tangible movable assets and, on examination, we do not believe that the majority of commercial EGAs that supply building would be caught. This note is not intended to be advice on specific cases and Professional Trustees should always take the correct specific technical advice on the nature of the asset and legal advice from Buckles for their case.
If Professional Trustees are concerned about EGAs being tangible movable property we are happy to provide advice to Professional Trustees on a case-by-case basis both whether an Energy Generating Asset is likely to be deemed a taxable asset and in respect of the contracts Schemes may will be asked to enter into in respect of these EGAs.
Samantha Hayward ProfPMI
Director at Sestini & Co.
Tel – 01633 492380
Email – samantha@sestiniandco.co.uk
Website – Home – Sestini & Co Pension Trustees Ltd (sestiniandcopensions.co.uk)
