Retrospective tax on past In specie transfers to pensions
Written on 10/08/2018

SIPP and SSAS providers and members are in shock 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.  Often this can be used to avoid CGT- for instance the transfer of shares pregnant with gain into a charity can allow the gain to be held over to the new owner and then encashed without liability to CGT. However doing this will void a claim for high rate tax relief on the contribution to charity (known as gift aid)

For pensions an in-specie contribution allows the pension administrator to claim basic rate tax relief and the member can claim further tax relief above the basic rate via relief at source. Broadly for every £80 contributed there is usually a top up of £20 tax relief from HMRC. 

Attractive stuff. 

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. If it is illiquid then this requires an independent and qualified valuer to value it. The asset is then re-registered into the names of the pension scheme trustees and the transfer is subject to stamp duty tax.

Tax relief can be claimed once the process is complete.

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 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 potentially explosive set of tax charges. 

First of all the Unauthorised payment and scheme sanction charges include the removal of the TFC amount. Secondly repayment of the PRAS and unauthorized payment charges can levied at up to a further 40% on top. In fact, in total, if you get a payment into a SIPP wrong, you could be on the hook for an astonishing 90% tax charge. 

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.

It would be most unwise to accept business on this basis while this issue remains unresolved. In specie transfers should be notified to PII insurers on your next renewal, where not already asked for, and you should speak to us about notifying your transfers post 2009 as a potential circumstance that may lead to a claim. 

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