In-specie pension contributions - what's the fuss all about?
SIPP and SSAS providers and members continue to be left in limbo over potential tax charges arising from in-specie contributions. HMRC has suspended tax relief on contributions whilst it investigates the position, leaving providers and members without tax relief and the risk of tax assessments back to 2009.
What are in-specie contributions?
An in-specie contribution is the transfer of property, shares or other assets into a pension instead of cash. An in-specie contribution does not involve the sale/purchase of the asset but a transfer of legal ownership.
If an in-specie contribution falls within HMRC's criteria, the pension administrator can claim basic rate tax relief and the member can claim any tax relief above the basic rate in a process known as relief at source. Broadly for every £80 contributed there is usually a top up of £20 tax relief from HMRC. The relief is claimed on a monthly basis by the SIPP / SSAS provider.
What are the criteria?
HMRC has had in place guidance on in-specie contributions since 2009. It provides that a member must first create a legally binding debt which the pension scheme is required to collect. A member does this by first notifying the specific monetary amount of its proposed contribution to the scheme.
Once the legally binding debt has been created, at that point an asset can be used to meet the debt rather than cash. The asset must be transferred at open market value and this usually requires an independent valuation from a qualified valuer. The asset is then re-registered into the names of the pension scheme trustees. The transfer is subject to stamp duty and capital gains tax.
Tax relief can be claimed once the process is complete and this can result in over and underpayments dependent on the valuation at the time of completion (which may have changed). If there is an underpayment the member has to top up the contribution with cash and if there is an overpayment the scheme will purchase the remainder of the asset and make a cash payment to the member which will not benefit from tax relief.
What’s the current fuss about?
In early 2016 HMRC changed one of its forms to require SIPP and SSAS providers to separate out cash and in specie contributions in their claims for relief at source. Following the form change, HMRC demanded further information and documentation from a number of SIPP providers and in the meantime withheld all tax relief (on both cash and in-specie contributions). It is understood after a recent freedom of information request that HMRC has refused tax relief on in-specie contributions to 34 SIPP and SSAS providers.
The basis for HMRC's stance is unclear. However, the available anecdotal evidence indicates that the reason for HMRC's position arises out of concerns that firms are not following HMRC's guidelines. In particular, (1) when valuing assets, (2) the nature of type of assets transferred into schemes and (3) whether the transfer of the assets was a pre-ordained transfer?
What's the potential tax issue?
The dispute over whether or not tax relief is available revolves around the word "paid" – contributions must be "paid" under relevant tax legislation and HMRC appears to be arguing that "paid" means cash and nothing else.
If HMRC challenges the application of tax relief to in-specie contributions it could go back to 2009 with claims for not only the relief but penalties and interest. If tax relief was not available this gives rise to a couple of issues:
(1) Unauthorised payment and scheme sanction charges
These tax charges would apply in circumstances where a pensioner has taken too much tax free cash as a result of dis-applying the tax relief. For example, a pensioner who thought their pension pot was worth £100,000 with tax relief could have taken 25% in tax free cash – i.e. £25,000. However, if the tax relief did not apply such that the pension pot was worth £90,000, then the available tax free cash would reduce from £25,000 to £22,500 leaving tax charges on the difference of £2,500.
(2) Repayment of tax relief claimed at source
For example, a promised contribution of £8,000 met by way of an in-specie contribution said to be worth £8,000 but in fact worth £4,000, would have created artificial tax relief of £1,000. This is because the 25% tax relief on £8,000 is £2,000 when in fact the tax relief should only have resulted in a saving £1,000 being 25% of £4,000. The difference between being £1,000.
Are there implications beyond SIPPs and SSASs?
Yes, contributions to some final salary schemes have been made by in-way of specie contributions on which the company receives corporation tax relief. There is no available anecdotal evidence that HMRC is challenging corporation tax relief at the moment but the relief is claimed annually rather than monthly and so this problem may not have been investigated by HMRC.
What's happening at the moment?
The Association of Member-directed Pension Schemes met with HMRC in Autumn 2016 in an attempt to resolve the situation.
However, the position remains unresolved with several pension providers having instructed lawyers to fight attempts by HMRC to claw back tax relief on certain pension scheme contributions. HMRC was separately raising information requests with SIPP providers. There is talk of a potential test case to resolve the issue, but at the moment members, providers and advisers in this area are left in limbo.