Diamonds could lose their sparkle in a Sipp

Being able to get tax breaks to buy a racehorse might sound thrilling, says Emma Simon in The Daily Telegraph, but, as with most Government innovations, the devil is in the detail.

As of 6 April next year, in theory at least, the restrictions on what can be held in a pension will vanish. However, holding alternative investments within a Sipp is unlikely to prove very straightforward, and while HM Revenue & Customs hasn't yet clarified the rules, it has already confirmed some restrictions that could land you with a nasty tax bill.

The key to the tax charge is how the assets are held and whether you derive any use or enjoyment from them. A £10,000 diamond necklace locked in a safe at your house, for instance, will still give rise to an annual £800 tax charge, even if it's never worn.

Start your trial of MoneyWeek today

Get unparalleled financial insight, analysis and expert opinion you can profit from.

Start your trial

Sign up for MoneyWeek’s free twice-daily newsletter.

Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.

Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.

Sign up

The worst sort of asset to hold in a pension is one deemed a "wasting asset" - one with a useful life of less than 50 years - such as a classic car or yacht, says Ian Cowie, also in The Daily Telegraph. Tom McPhail, pensions expert at IFA Hargreaves Lansdown, explains that if you buy a £50,000 yacht within a Sipp, the benefit to you will be calculated as 20% of its value, ie £10,000 each year. That gives rise to an annual tax charge of £4,000 (40%), plus a wasting asset tax charge equal to 15% of the benefit - another £1,500 per year. That means that within ten years, you would have paid £55,000 worth of tax on a £50,000 boat.

Other investments, such as wine and woodland, benefit from tax breaks outside a pension, making them unlikely to be worth holding in your Sipp. Wine is usually exempt from capital gains tax and woodland is exempt from inheritance tax, if owned for more than two years.