Until recently, you could use assets you already owned as a payment into a pension scheme. In fact, advisers would often recommend a Self-Invested Personal Pension scheme, (SIPP), as a pension structure to protect assets like shares, development land or commercial premises from income or capital gains tax, which pensions have always avoided.
Imagine you had listed shares that you purchased a while ago and you wanted to make a pension contribution. Shares are an allowable asset into a SIPP and it is relatively easy to obtain a monetary value that would be accepted by both the pension administrator and Her Majesty’s Revenue and Customs, (HMRC). This would be an In-specie payment; with the asset being accepted for value in place of cash.
Following a recent decided case in the Tax First Tier Tribunal, HMRC has lost a case refusing tax relief on an “In-Specie” pension contribution, in this specific case, unlisted shares in a group holding company to a value of £68,324.
Nationally, SIPP providers have been holding their breath waiting for someone to challenge HMRC, with one Leicester provider setting aside a £900,000 provision to meet a potential HMRC challenge. Many providers have completely stopped any non-cash contributions to new or existing schemes.
Theoretically, they could sell the asset to a third party, pass the cash to the pension scheme as a cash pension contribution, then the scheme could buy the asset as an investment, but this is fraught with cost and dangers. Until HMRC effectively placed a block on such In-specie transfers, the process was the pension member would contract to make a pension contribution, advise the provider the asset used to provide the value, the provider would then get the asset independently valued, with the pension member making up any shortfalls in value in actual cash. The scheme would then own the asset, and the pension provider would recover the tax relief on the pension payment as normal.
So, why is this such a large issue for SIPP providers and SIPP clients? In many cases, the pension members making the pension contributions are cash poor, but asset rich and already own the asset in question. Moving the asset into a SIPP allows them to maintain a degree of control over the asset but minimise any tax bills until retirement or beyond. For some, it will be the cornerstone of any pension planning and possibly the only diversification of the family business, splitting the commercial property from the business assets.
Many commenters suggested that HMRC were concerned by “inappropriate valuations” on assets taken into pension schemes, but the tone of the Tribunal hearing suggests it was wholly about the tax relief on the pension premiums received. HMRC’s argument appeared to be that as the premiums were not in “cash”, there was no liability on them to pay in the tax relief on the premium. This would appear to be in keeping with the Treasury’s desire to restrict tax relief wherever possible.
Following the tax tribunal decision, the actual motivation of HMRC, becomes less relevant; the questions are now when will in-specie assets be processed routinely within SIPPs again and will HMRC seek to get the actual law of the land changed to restrict tax relief?
In the meantime, any business owner who has business premises and no or insufficient pension planning in place should look at the possibilities offered by a SIPP.
If you would like to know more about how we can help you plan and realise your financial goals then contact us at firstname.lastname@example.org or call us on 01223 792 196.
The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly, no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.