First and foremost, a GDCV is a mouthful! For some reason the pension world is littered with four letter acronyms rather than the usual three and this one doesn’t really roll off the tongue – Genuinely Diverse Commercial Vehicle.
The term Genuinely Diverse Commercial Vehicle doesn’t exist anywhere in tax legislation. It is merely a concept introduced by HMRC in their Pensions Tax Manual. A GDCV isn’t something that has a prescribed form and a variety of entities could qualify including companies, collective investment schemes and even individuals. The reason GDCV’s are of particular interest is due to the tax advantages they afford pension scheme investment in taxable (residential) property.
It is a common misconception that a registered pension scheme cannot invest in residential property when in fact an overwhelming majority of UK pension funds have exposure to this asset class. HMRC are very clear on their position on investments (direct and indirect) into residential property and there are hefty tax charges for doing so but there are three exemptions, all of which fall under the category of GDCV. For reference, the original source legislation can be found in schedule 29A of the Finance Act 2004 and the accompanying guidance in the Pension Tax Manual.
- Real Estate Investment Trusts (REITs)
A REIT is stock market listed UK company. They provide opportunities for investors to access and own property assets indirectly in a tax-efficient manner. Qualifying REITs do not pay corporation tax on their profits because one of the conditions of being a REIT is that they distribute at least 90% of their taxable income to shareholders which is then taxable on them. In the case of pension funds holding shares there is no further tax to pay.
A pension fund holding shares in a REIT invested in residential property is exempt from unauthorised payment charges under the legislation concerning GDCVs.
- Other kinds of vehicle
HMRC guidance is disconcertingly vague in this regard and merely states that “these are vehicles that meet certain conditions and the pension scheme’s interest in the vehicle is such the pension scheme and associates directly or indirectly hold less than 10% in the vehicle and there is no potential for use or occupancy of any taxable property by scheme members or connected persons.”
In practical terms, applying the above means that all manner of different investment structures can qualify such as companies, OEICs, Unit Trusts, Limited Partnerships, etc as long as the conditions are met. A pension fund invested in residential property via these mechanisms are also exempt from unauthorised payment charges under the legislation concerning GDCVs.
- Trading concerns
HMRC guidance in this instance states “these are vehicles that are arm’s length trading vehicles. There are four conditions to be met:
- the vehicles main activity is the carrying on of a trade, profession or vocation
- the pension scheme either alone or together with associated persons does not have control of the vehicle
- neither a pension scheme member nor a person connected to such a member is a controlling director of the vehicle or any other vehicle which holds an interest in the vehicle directly or indirectly
- the pension scheme does not directly or indirectly hold an interest in the vehicle for the purposes of enabling a pension scheme member or a connected person of such a member to occupy or use the property.”
A great example of this would be the purchase of shares in a listed housebuilder. At any one time they are likely to have thousands of houses on their balance sheet as either trading stock or from part-exchange deals. It would be nonsensical to penalise a pension fund for an indirect investment in residential property for holding these shares and are therefore exempt from unauthorised payment charges.
With three clear exemptions listed, the problem is not that the primary legislation and HMRC guidance don’t allow investment into residential property, it is that those desirous of using their pension fund to do so don’t devote sufficient resource into structuring their pension fund to be able to exploit the opportunity.