Tony Granger examines the effect of the latest reported HMRC clampdown on in-specie pension contributions.
Pension contributions to self-invested personal pensions (SIPP) and small self-administered pension schemes are mostly made in cash or monetary amounts. Contributions may also be made in other asset types, such as property or shares, but paid as a monetary amount (see HMRC’s Pensions Tax manual at PTM042100).
HMRC’s guidance states: ‘…it is possible for a member to agree to a monetary contribution and then to give effect to the cash contribution by way of a transfer of an asset or assets’.
Obligation and agreement
There must be a clear obligation on the member to pay a contribution of a specified monetary sum (say £10,000), which needs to create a recoverable debt obligation. There must also be a separate agreement between the scheme trustees and the member to pass an asset to the scheme for consideration. That debt may be paid by offset against the consideration payable for the asset. The scheme agrees to purchase the asset at market value.
Market values higher or lower
If the asset’s market value is lower than the contribution debt, the balance will be payable in cash. If higher, the excess will not be treated as a contribution.
If the cash contribution debt is not created, the transaction is the acquisition of an asset by the scheme, not a contribution.
Tax relief
Where tax relief is at source (RAS), the amount of cash contribution specified should, if applicable, be the net amount after the individual exercises his right to deduct from the payment the relevant rate of tax (see HMRC’s guidance at PTM044220). The relief at the relevant rate can be claimed by the scheme administrator in the normal way from HMRC, and if appropriate the individual can claim higher rate relief via their self-assessment return.
The contribution must be within the member’s annual allowance and earnings profile (for 2016/17, this is 100% of earnings capped at £40,000, unless the member is earning over £150,000, in which case the cap could reduce to £10,000).
Capital gains tax (CGT) and stamp taxes may be incurred if an asset is transferred as an in-specie contribution.
In-specie contributions
In this context, ‘in-specie’ broadly involves transferring the ownership of an asset from one person or entity to another without the need to turn it into cash first. HMRC’s guidance recognises that pension contributions may be made in this manner by creating a debt as a monetary amount. This has enabled property or shares to be transferred by a member to the pension scheme – often in stages, to keep within the annual allowance.
HMRC’s clampdown
However, a number of SIPP providers reported in September 2016 that HMRC was not granting tax relief on in-specie contribution schemes, and as a result were withdrawing from the market offering in-specie scheme contributions. HMRC stated that if its guidance is followed, tax relief at source will follow. It, therefore, became unclear why HMRC would withhold it. On 10 November 2016, it was reported in FT Adviser that HMRC is finding fault with a process they themselves had agreed.
HMRC appear to be investigating on a number of fronts: (i) Tax abuse where intellectual property rights were transferred with unrealistically high valuations in unquoted shares (Freedom of information request by New Model Adviser 6 October 2016); (ii) the cash debt arrangements had not been correctly set up; and (iii) the property being transferred must be mortgage and debt free.
HMRC may deny tax relief in previous tax years following its investigations. The consumer may incur trade costs if forced to sell the asset instead of making an in-specie transfer, and could still have CGT and possibly stamp taxes to pay.
Practical Tips:
- If previous in-specie contributions have been made to a pension scheme, be aware that you could lose tax relief previously granted, or have it denied for current contributions.
- Fund cash to the pension fund to purchase the asset.
- Get the pension fund to take out a loan or bridging finance to buy the asset.
- Seek expert professional pensions advice, particularly when considering in-specie contributions.
