"We are now seeing more and more illustrations of the merits of what we have lost," says Aries Pension & Insurance Systems' Ian Neale as he examines pension tax rules.

The pension tax rules about SIPP investments do not place any restrictions on what can be held in a SIPP. However, if the investment is classed as "taxable property" under amendments made by the 2006 Finance Act (inserting s.174A and Schedule 29A into FA 2004), it is taxable at such penal rates as to effectively deter most would-be investors.

Taxable property can take two forms:

(a) residential property, i.e. a structure that is used or suitable for use as a dwelling; and

(b) tangible moveable assets, i.e. things you can touch and move e.g. works of art, jewellery, antiques, classic vehicles, etc.

The legislation is voluminous and complicated, as typically the Government has sought to define unambiguously in law what constitutes taxable property. On "tangible moveable property" it threw in the towel early: there is no definition. Instead, Sch 29A states at para 11:

"(1) The Treasury may by order provide that, for the purposes of the taxable property provisions, any specified description of tangible moveable property is treated as not being taxable property."

This means that if it can be touched and moved, it is taxable property unless secondary legislation excepts it. (Needless to say, very few exceptions have been made.) Arguments have arisen, predictably, about whether solar panels installed as part of a factory roof, or a ten-tonne piece of heavy machinery bolted and cemented to the factory floor, are "moveable".

The Treasury made a more determined effort to define, in paras 7 – 10 of Sch 29A, what is and is not "residential property", taking care to give itself powers to amend this list by order. Among the uses for a building which do not make it "residential" for taxable property purposes is a hall of residence for students; other such uses include a hospital or hospice and a prison "or similar establishment". None of these terms are defined in the law.

This should not be surprising. Nor is the scale of development of official guidance, for example the Registered Pension Schemes Manual (RPSM), in which a whole page (RPSM 071.09.085) is devoted to "a number of characteristics which assist to indicate" whether or not a building occupied by some students is a "hall of residence". Quite correctly, HMRC is not here asserting a complete definition; it is simply 'guidance'.

Unfortunately, some at HMRC evidently persist with the hopelessly optimistic view that such terms can be, and indeed are, defined as a matter of fact, between the law and if necessary the guidance. This is a fundamental mistake as there is often scope for argument about meaning. The problem is that HMRC's right to arbitrate has been taken away.

The FA 2004 replaced the former discretionary regime with a legal framework where there is no scope for discretion. Everything the Parliament decided was permissible activity is prescribed, and anything falling outside the rules is thereby to be treated – and taxed – as an unauthorised payment.

We are now seeing more and more illustrations of the merits of what we have lost (even though at the time we often bitterly complained about the sometimes arbitrary and inconsistent way in which it worked). The threat of unauthorised payment charges is sufficient to deter some pension scheme investments that might, if a test case could be afforded, be found by a court of law not to be taxable property.

Written by Ian Neale, director, Aries Pension & Insurance Systems Ltd

ian@ariespensions.co.uk