Benefits of including a firm’s intellectual property within a SSAS or SIPP
Martin Tilley, director of Technical Services, Dentons Pension Management looks at ways a company’s intellectual property can be sold to a SIPP or SSAS and the benefits for the firm and the pension
Amongst the more unusual asset classes you may find within registered pension schemes, is intellectual property. Whilst offering the potential for regular income and capital growth, there are many hazards, which need to be acknowledged and navigated.
Intellectual Property refers to “creations of the mind” such as inventions, symbols, names and images and includes patents, trademarks, software, databases, and designs; and copyright, i.e. the legal right to print, publish, perform, film, or record literary, artistic, or musical material.
Intellectual property (IP) is an important financial and legal asset of a company and there have been estimates that it could represent more than 80% of a company’s value. Therefore, when a business is looking to grow, it might consider exploiting the capital value of its intellectual property. One way of doing this is to sell its IP to a SIPP or SSAS (in which one or more of the company’s directors are members) at market value and then lease the IP back from the scheme at the market rate.
The company can benefit from the injection of capital into the business to further aid its growth. In addition, as the IP now resides within the SIPP or SSAS trust, it is not part of the company or its finances and is therefore protected from creditors in the event of a company failure.
The SIPP or SSAS benefits from a regular tax-exempt income because of the lease terms, as well as from the potential for growth in the capital value of the IP. However, the SIPP or SSAS member(s) will need to bear in mind any potential effects on their Lifetime Allowance limits.
IP is a specialist investment and not appropriate for the inexperienced investor. Nor is it mainstream, with only a handful of SIPP operators prepared to accept it into their book of assets.
The process of acceptance of the asset is also far from straightforward and it will be a prime consideration of the SIPP operator or of the SSAS trustees that the transaction is undertaken at fair market value (the purchase is almost certain to be a connected transaction) and correctly documented.
It is here that an independent professional valuation will be necessary. The SIPP or SSAS must pay neither too little, nor too much for the asset it is acquiring and similarly the company should pay an appropriate market licence fee to the SIPP or SSAS for use of the IP. Depending upon the business sector in which the company operates and the nature of the IP, the valuation will most likely have to be undertaken by a specialist valuer of IP. Overpayment for IP could trigger an unauthorised payment tax charge.
There are accredited firms, for example, those having attained the standard of ISO 10668, which deal with brand valuation, which might be suitable. The standard specifies the procedures and methods of measuring value including objectives, bases of valuation, approaches to valuation, methods of valuation and sourcing of quality data and assumptions.
The pension provider will also wish to satisfy themselves not only of the current value, but also the means of subsequent valuation and potential prospects for sale of the investment should this be necessary, for example to provide liquidity.
The terms of the sale/purchase and subsequent leasing of the IP must be properly documented by a specialist solicitor, ensuring that all parties’ interests are protected.
Due to the specialised nature, the valuation and legal costs will not come cheaply and in order for the investment to be cost efficient, it is normal for pension providers to set minimum values for IP acceptance and, so as not to compromise liquidity, may also limit the proportion of the pension fund value that can be invested into IP. Only larger funds may therefore be able to consider IP investments.
Finally, IP can be managed and exploited to create value and this can often be achieved most efficiently when the IP owner and leasee are connected and therefore share common goals. The value of the IP can, to some extent, be enhanced by the leasee through their actions and use of it but value can similarly be reduced. There is also the concern of double jeopardy in that if the leasee company were to fail, then the value of the IP and therefore the member’s pension could also suffer.
In summary, the sale of IP into a SIPP or SSAS can benefit both the selling entity and the pension scheme but each transaction should be considered individually and from both sides with the proper due diligence and valuations carried out.
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