Pension Introduction

Taxation of ‘Taxable Property’Where an ‘investment regulated pension scheme’ directly or indirectly acquires ‘taxable property’ (ie. residential property or tangible moveable property) this creates an unauthorised payment tax charge on the member whose arrangement acquires the asset (or whose arrangement uses scheme funds to improve, convert or adapt ‘taxable property’). However, the benefit in kind charge on personal use of registered pension scheme assets does not apply to assets taxed in this way.  The tax provisions are set out in sections 185A to 185I of the Finance Act 2004.  The Pensions Schemes (Taxable Property Provisions) Regulations 2006 – SI 1006/1958 provide that an unauthorised payment is to be treated as made to a member of an investment-regulated scheme where a lease of taxable property is varied to increase the rent by an abnormal amount (ie. as defined in paragraph 15 of Schedule 17A to the Finance Act 2003).Income received from ‘taxable property’ is charged on the scheme administrator. This is assessed as a scheme sanction charge at 40%. If the net income from the property is less than 10% of the value of the property then the scheme administrator is taxed on a deemed income of 10% of the value of the property rather than the actual income.The scheme administrator also pays tax at 40% as a scheme sanction charge on capital gains arising on disposal of the property.  The gain is calculated as if it had been made by a UK resident but without the annual exempt amount (ie. currently £9,600).The tax treatment of any income or PCLS paid out of the registered scheme based on ‘taxable property’ assets is the same as for any other benefits paid from the scheme.

If the amount of scheme chargeable payments in a 12 month period reaches the relevant threshold the scheme could be de-registered.  HMRC has, however, indicated that it would not normally view a one-off acquisition of ‘taxable property’ as something that would lead to de-registration even where the relevant threshold is breached.  De-registration will be considered in exceptional cases (eg. the multiple purchases of ‘taxable property’, or where avoidance or evasion is present).

The following example will help to demonstrate how tax is levied on ‘taxable property’.

In June 2010 David Phillips used all of the monies in his SIPP to buy a three bedroomed house costing £350,000.  It generates rental income, after expenses of £18,000 a year.  The house is regarded as ‘taxable property’. The tax charges are:

Person liable	Tax charge	Levied on (£)	Tax Rate (%)	Amount of Tax Due (£)
David	Unauthorised member payment	350,000	40	140,000
David	Unauthorised payments surcharge	350,000	15	52,500
Scheme administrator	Scheme sanction charge	350,000	15	52,500
Total				245,000

In addition to the above if HMRC decided to de-register the scheme as the ‘taxable property’ represents more than 25% of the scheme a further charge, payable by the scheme administrator, of £119,000 (ie. 40% of the value of scheme assets – £350,000 less the scheme sanction charge of £52,500).

In the first year the scheme administrator also faces a £14,000 tax charge (ie. 40% on deemed income of £35,000). There is also a scheme sanction charge of 40% on any realised capital gains.

‘Taxable Property’ – Transitional Protection

Up to 6 April 2006 pension schemes were able to hold interests both directly and indirectly in some types of residential property and in some cases, tangible moveable property.

The above ‘taxable property’ provisions do not apply, subject to certain conditions, for taxable assets that were legitimately held under the rules operating before 6 April 2006 and which are not improved.  Similar protection applies for indirect holdings in taxable assets legitimately held before 6 April 2006.

The following table sets out a list of the types of scheme and investments that are subject to transitional protection.

Type of scheme and investment	Availability of Transitional  Protection
SIPPs, SSAS and S.226 -    Direct investment in residential property	-     Not available – if the purchase of residential property was not allowed under pre A-Day rules(c) where certain narrow classes of residential property were allowed under pre A-Day rules they will be protected provided they are not materially improved (except where such improvements are undertaken wholly to comply with a statutory requirement or requirement of a statutory body) on or after that date.  These include investments in ground rents, feu duties and property related to an employment for an employee unconnected with the pension scheme.
SIPPs and SSAS -     Off-plan purchases (or property that is not fit for use as residential property)	-     If the investment was made before midnight on 5 December 2005 and the off-plan investment does not subsequently become residential property after 5 December 2005 it will be protected.-     There is no protection for any off-plan purchases made on or after 5 December 2005.
SIPPs, SSAS and S.226 -    Indirect investment in residential property or where property purchased directly under the pre-1991 rules for SSAS	-     Where an indirect investment is made before midnight on 5 December 2005 and that investment is not explicitly prohibited under the current regime it will be protected, provided it is not materially improved (except for a statutory requirement) after 5 December 2005. There will be no protection if there is any post 5 December 2005 material improvement expenditure (unless for a statutory requirement).-     Where a property was purchased by a SSAS under the pre 1991 rules the investment will be protected, provided it is not materially improved (except for a statutory requirement) after midnight on 5 December 2005. There will be no protection if there is any post 5 December 2005 material improvement expenditure (unless for a statutory requirement).There will be no protection if the indirect investment is not allowed under the current regime.
Section 590 schemes -     Direct and indirect investment in residential property	-     All purchases of residential property made before A-Day, by one of these schemes which was set up and approved before midnight on 5 December 2005 will be protected, provided they are not materially improved (except for a statutory requirement) on or after 6 April 2006.-     No protection for any investments in residential property made by a s.590 scheme set up and approved after midnight on 5 December 2005

Where a SIPP has acquired a property, eg. off-plan, with the intention of holding it as an investment but because of the introduction of the ‘taxable property’ changes, it is decided to dispose of the property, HMRC will consider in each case whether the disposal is regarded as trading or investment.  Advice on this can be found in the Business Income Manual at BIM 60000 onwards. However, the transaction is unlikely to be regarded as a trading one unless there has been a change of intention (of the type discussed in BIM 60060) normally resulting in some form of physical change to the asset.

In the case of off-plan, the fact that it was in the process of being developed as at 5 December 2005 in accordance with the contract originally entered into between the developer and the SIPP, would not make it a trading transaction for the SIPP where the development continues.

Investment in shares of sponsoring employer

There is a limit on holdings of shares in the sponsoring employer of 5% of a scheme’s assets or 20% of scheme assets where they relate to more than one sponsoring employer.  In the latter case the amount that may be held in respect of any one employer is limited to 5% of scheme assets.

However this restriction does not apply to registered schemes that are not ‘occupational pension schemes’ as defined in the Finance Act 2004.  Therefore a registered scheme established as a SIPP could invest up to 100% of the scheme assets in shares of the ‘sponsoring employer’.  (This is provided that the employer did not set up a trust for the SIPP because the trust would mean the SIPP would be classified as an ‘occupational scheme’ under the new regime).

The percentage of value is calculated at the time the payment is made for the shares by the scheme, and is not re-tested at a later date, unless new shares in the sponsoring employer are acquired.  There are no restrictions with regard to the percentage of shares which can be held in one company (eg. a registered scheme could potentially own 100% of the share capital of a company) provided that the sums invested are less than 5% of the fund value.

Where the 5% or 20% limits are exceeded, the amount is subject to an unauthorised payments charge on the employer.  The scheme is also subject to a scheme sanction charge.

Where a scheme already held shares in a sponsoring employer prior to 6 April 2006 the shares may continue to be held.  If, however, the scheme purchases shares in a sponsoring employer after 6 April 2006 the 5% limit will apply and the total holding of shares including the value of the shares held prior to 6 April 2006 will have to be taken into account.

When considering investment in unquoted shares of the sponsoring employer full account should be taken of the provisions in respect of ‘taxable property’ (see section 2) above introduced by the Finance Act  2006.  In particular the complex rules on indirect holdings of ‘taxable property’ could prevent a SIPP from holding any shares in the employer of a member.

Loans

Loans are only acceptable if they are genuine investments of a pension scheme.  They should be prudent, secure and on a commercial basis.  There is, however, no legislative restriction on the purposes for which a loan to a sponsoring employer may be used where it is made on or after A-Day.

Although a loan to a member, or former member is possible it is always treated as an unauthorised payment equal to the amount of the loan.  Similarly a loan to a person connected to the member is treated as an unauthorised payment to the member (unless the connected person is also a scheme member when it will be treated as a unauthorised payment to the connected person.)

Loans may, however, be made to an unassociated third party (ie. not connected to members or sponsoring employers).  Such loans must normally be on an arms length basis on commercial terms.  Care should be taken with any loan to a ‘third party’.  While the ‘third party’ may not be a ‘connected person’ (eg a company of which a scheme member, or a person connected with the member, is a director but does not control the company directly) the borrowing ‘third party’ could still be a ‘sponsoring employer’ as defined below.  In which case the loan would need to meet the five conditions set out below to be an authorised employer loan, or otherwise it will be an unauthorised employer payment.

If a loan is to a trading company of which the member or a connected person is a controlling director but the company is neither a ‘sponsoring employer’ (see below) nor controlled directly or indirectly by the member or a connected person the ‘taxable property’ rules will apply (as the ‘taxable property’ exemption in respect of a trading company is only applicable in respect of an authorised employer loan).  This would result in an unauthorised payment charge on the employer.

Loans to ‘sponsoring employers’, other than in the form of bonds issued on the open market, must comply with each of the five key tests, set out later in this note, to be an authorised employer loan.  Any loan not meeting any of the five criteria will be an unauthorised payment and result in an unauthorised payment tax charge on the scheme administrator at 40%.

A ‘sponsoring employer’ is defined in section 150(6) of the Finance Act 2004 and means in relation to an occupational pension scheme ‘the employer, or any of the employers , to or in respect of any or all of whose employees the pension scheme has, or is capable of having effect so as to provide benefits’.  From this it appears than an authorised employer loan can only be made to an employer by an occupational pension scheme, whose rules enable that employer to provide benefits for its employees via the scheme.  However, unless the pension scheme is incapable of providing benefits for members who are employees (including directors) of an employer then the employer would seem to be a ‘sponsoring employer’ whether or not it is associated with a participating employer.

The whole question of who constitutes a ‘sponsoring employer’ is highly complex and while we believe the above accurately reflects the definition in section 150(6) we would strongly recommend that legal advice be taken where the intention is to make a loan to a non participating employer.  If an employer is not a ‘sponsoring employer’ but is controlled directly or indirectly, by a member of the pension scheme or a person connected with that member, any loan to that employer by the scheme would constitute an unauthorised member payment.

It should be noted that such loans to a sponsoring employer can only be made from an employer sponsored registered scheme (ie. normally an occupational scheme). It would not be possible for such a loan to be made from a SIPP. Where a loan is made by a registered scheme that is not an occupational scheme to an employer who is connected to the member this will result in a tax charge on the member.

Any guarantee of a loan, made by a registered scheme to

· a sponsoring employer, or

· a member of the scheme, or

· a person who is connected to the sponsoring employer or the member is treated as a loan and is subject to the same requirements below as set out for a loan.  The amount of the loan is equal to the amount guaranteed by the scheme.

Five conditions for an authorised employer loan

(i)         be secured as a first charge on assets that are at least equal to the loan.  Subsequent falls in the value of the security are permitted, provided these are not the result of actions taken by the employer or connected persons. The charge must take priority over any other charge on the assets.

Where the asset used as security is replaced by another asset, the value of the replacement must be at least equal to the lower of the market value of the asset it has replaced or the amount of the loan outstanding plus interest at the time the security is replaced.

(ii)        have an interest rate equal to the average of the base lending rates of the following companies, plus 1%.

• the Bank of Scotland
• Barclays Bank Plc
• HSBC Bank Plc
• Lloyds TSB Bank Plc
• National Westminster Bank Plc, and
• The Royal Bank of Scotland Plc

The interest rate calculation is prescribed in the Registered Pension Schemes (Prescribed Interest Rates for Authorised Employer Loans) Regulations 2005 – SI 2005/3449

Where the average is a multiple of 0.25% that will be the rate.  Where it is not such a multiple the average should be rounded up to the next multiple of 0.25%.  This calculation is undertaken on the ‘reference date’ (ie. the 12th working day of the month preceding the ‘operative date’). For this purpose the ‘operative date’ is the 6th working day of the month concerned and the rate so calculated applies for a month.  It appears that a recalculation of the rate is required for each subsequent month of the term of the loan.

A scheme may make a loan at a fixed rate of interest as long as that interest rate is at least the rate specified at the time the loan is advanced.  As long as the terms of the loan remain unchanged there is no requirement to alter the interest charged on the loan during its life.

(iii)       be for a term of less than 5 years.  The total amount owing (including interest) must be repaid by the loan repayment date.  There are no restrictions regarding liquidity  considerations when determining the date by which a loan must be repaid, eg before a member’s retirement date, apart from the amount of the loan.  It is therefore entirely a matter for the trustees to decide when a loan should be repaid, subject to the 5 year limit, having regard to the likelihood of paying retirement benefits at some future date.

(iv)       be no more than 50% of the market value of scheme assets as at the date the money is loaned by the employer.  This limit is not retested subsequently if there is a fall in the value of the scheme’s assets unless the terms of the loan are changed.  Any further loan advances to the employer are treated as a new loan and the 50% limit is retested at that time.

(v)        be repaid either by equal instalments of capital and interest for each complete year of the loan.

There is also only one opportunity for schemes to roll over a loan (ie. where there are amounts owing on the 5th anniversary) and only then for a maximum extension period of 5 years.  This allows a loan to be extended where the sponsoring employer is having genuine difficulties making repayments without having to find replacement security for the loan if the original security has fallen in value

Where the above terms are not complied with the loan will be seen as an “unauthorised employer payment”, which if large enough could result in HMRC withdrawing the registration of the scheme.  Trustees are expected to enforce the repayment terms.  However, care should be exercised where the sponsoring employer has given security on residential property or other ‘taxable property’ which it owns because enforcing repayment in specie rather than in cash realised from the sale of such a secured asset will trigger an unauthorised payments charge under the ‘taxable property’ provisions.

The unauthorised payment is calculated separately for each one of the five tests failed.  However, to avoid double charging, if the loan fails on more than one of the tests the unauthorised payment is the greatest amount calculated in respect of all of the failed tests.  In any event the payment must not exceed the amount of the loan when it was made.   The unauthorised payment charge arising in respect of each of the above five tests is described below.

(i) If a loan ceases to be secured after it is made or the asset is not secured as a first charge, an unauthorised payment charge arises on the amount outstanding plus interest.  If any transaction by the sponsoring employer or a person connected with the employer, reduces the value of a security, an unauthorised payment charge arises on the amount of the reduction in the charge where a replacement security is not equal to the lower of the value of the former security and the amount of the loan outstanding.  For example,

Albion Ltd registered pension scheme makes a loan to Albion Ltd of £250,000.  Albion Ltd offers a property valued at £300,000 as security.  One year later Albion Ltd sell the property and replace the security with another property worth £200,000.  The amount of loan outstanding (including interest) is £230,000.  This will result in an unauthorised payment charge of £12,000 (ie 40% x £30,000 – the difference between the loan outstanding and the value of the replacement security)

(ii) If the interest rate charged on a loan is less than the prescribed rate an unauthorised payments charge arises on the loss of interest involved.  This is determined using the formula

(100-[IR/PIRx100] / 100 )      x AO

Where:

IR is the actual rate of interest payable on the loan

PIR is the prescribed rate of interest

AO is the amount of loan outstanding (excluding interest).

For example, Arsene Ltd registered pension scheme makes a loan to Arsene Ltd of £50,000 at an interest rate of 4.5%, when the prescribed rate is 5%.

The amount of the unauthorised payment is:

(100-[4.5/5 x 100]) / x £50,000 = £5,000

Arsene Limited will be subject to an unauthorised payments charge of £2,000 (ie 40% x £5,000), and Arsene Ltd registered pension scheme will be subject to a scheme sanction charge.

(iii) If the term of a loan exceeds 5 years (and it has not been rolled over in accordance with the conditions set out earlier in this section) an unauthorised payments charge will apply in accordance with the following

([DLRP/DFY x 100]) / 100     - 100 x AO

Where:

DLRP is the total number of days from the date the loan is taken out to the actual loan repayment date.

DFY is the number of days in 5 years

AO is the loan amount outstanding (including interest) at the beginning of the loan or when the terms of the loan are altered

For example, Heather Ltd registered pension scheme makes a loan of £10,000 on 6 April 2006 to Heather Ltd.  The loan repayment date is 5 October 2011.

The unauthorised payments charge is:

([2009/1826 x 100] / 100 )   - 100 x £10,000 = £1,002

Heather Ltd will pay 40% x £1,002 = £400.80

Heather Ltd registered pension scheme will be subject to a scheme sanction charge.

(iv) Where a loan exceeds the 50% limit at the time it is made, an unauthorised payment charge arises on the difference between the amount of the loan and 50% of the value of the fund before the loan was made.

(v) If loan repayments are not made in equal annual instalments, an unauthorised payments charge arises on the largest amount of the difference between the ‘required amount’ and the total amount payable during a 12 month loan period.

The amount of capital and interest repayments payable each loan year (the ‘required amount’) is calculated using the formula

[L + TIP/TLY] x NLY

Where

L is the amount of the loan

TIP is the total interest payable

TLY is the total number of loan years, and

NLY is the number of loan years in the period

For example, Falcon Ltd registered pension scheme makes a loan to Falcon Ltd of £50,000 on 1 January 2007 for a period of 5 years.  The total interest chargeable on the loan over the period is £20,000.  The following repayments must be made by Falcon Ltd.

[(£50,000 + £20,000/5] x1 = £14,000

If in the above example the loan agreement provided for the following payments to be made:

Year 1	£10,000 (difference from required payment is £4,000)
Year 2	£18,000 (nil)
Year 3	£12,000 (£2,000)
Year 4	£14,000 (nil)
Year 5	£16,000 (nil)

The unauthorised payment is determined on the highest deficit (ie £4,000 in this case) in the 5 years.

The unauthorised payment charge is therefore £4,000 x 40% = £1,600

The scheme will also be subject to a scheme sanction charge.

Loan made to Employer Prior to A – Day

Where an occupational pension scheme made a loan to a sponsoring employer before 6 April 2006, the existing loan is not subject to the new rules provided

• the occupational scheme became a registered pension scheme
• there is no alteration in the repayment terms of the loan after 5 April 2006
• the repayment date of the loan (capital and interest) is after 6 April 2006.

If after 6 April 2006 there is a change in the repayment terms, any amount arising (including interest) will be subject to the new rules.

A postponement of the repayment date will not be treated as a change in repayment terms if

• there is an amount outstanding on the date which the amount should have been paid
• the rollover does not exceed 5 years
• there has been no previous rollover on or after 6 April 2006
• there are no other changes to the repayment terms of the original loan.

Impact of DWP Legislation

The DWP continue to place restrictions on loans by occupational schemes to sponsoring employers.  These are set out in the Occupational Pension Schemes (Investment) Regulations 2005 – SI 2005/3378.

An occupational scheme, other than a ‘small scheme’, may not invest more than 5% of the current market value of the scheme’s resources in employer-related investments, and none of the scheme resources may be used to provide a loan to the employer.

A ‘small scheme’ means a scheme with fewer than 12 members, where

(a) all members are trustees of the scheme and either

(i) the provisions of the scheme provide that all decisions which fall to be made by the trustees are made by the unanimous agreement of the trustees who are members of the scheme, or

(ii) the scheme has a trustee who is independent in relation to the scheme for the purposes of section 23 of the 1995 Act (power to appoint independent trustees), or

(b) all the members are directors of a company which is the sole trustee of the scheme, and either

(i) the provisions of the scheme provide that any decisions made by the company in its capacity as trustee are made by the unanimous agreement of all the directors who are members of the scheme, or

(ii) one of the directors of the company is independent in relation to the scheme for the purposes of section 23 of the 1995 Act.

These Regulations also confirm the transitional provisions for loans that were in place for loans made prior to certain dates in accordance with either the Occupational Pension Schemes (Investment of Scheme’s Resources) Regulations 1992 or the Occupational Pension Schemes (Investment) Regulations 1996 – SI 1996/3127.

Scheme Borrowing

A registered pension scheme may borrow for any purpose.  Borrowing may be from any individual, company or financial institution whether or not they are connected to the scheme, but any borrowing from a connected party which is not made on commercial terms is subject to a tax charge.

Borrowing by the scheme is limited to 50% of the net value of the fund immediately before the borrowing has taken place under a money purchase arrangement.  For this purpose scheme assets are defined as the market value of members’ and dependants’ unsecured and alternatively secured pensions and the market value of any non vested benefits. Where a scheme pension or a dependant’s scheme pension is being paid the capital value is determined as 20 times the annual pension payable.  It is important to note that there is no separate limit to fund a liability for VAT, for example.

The following example may help to illustrate how the borrowing rules operate.  By A-Day Philips John had accumulated a fund of £300,000 with existing borrowing of £75,000.  The maximum amount that can be borrowed post A-Day is 50% of his net scheme assets (i.e. in this case £300,000 less the existing borrowing of £75,000 = £225,000).  The maximum the scheme can borrow is therefore £112,500, but as borrowing of £75,000 was already in place a maximum of an additional £37,500 can be borrowed.

Where a scheme borrows an amount in excess of the 50% limit, the scheme is treated as making a scheme chargeable payment and is subject to a scheme sanction charge of 40% on the excess amount of the borrowing above the 50% limit.

Where a scheme borrows there is no requirement that this is on a secured basis.

Borrowing which took place before 6 April 2006 was not re-tested at that date.  However, it will be taken into account in assessing the 50% limit should further borrowing be required on or after 6 April 2006.

Circumstances can arise where the trustees wish to restructure their existing borrowing, especially where the lender’s rate of interest has become uncompetitive.  HMRC has confirmed that where the new borrowing is immediately used to pay off the existing borrowing it will not be treated as an increase in borrowing even though the borrowing is effectively doubled for a short period.

HMRC has also confirmed that when a pension scheme restructures a loan or remortgages and the amount of the loan is not increased, this will not be deemed a new loan even where the term of the loan is being extended and will not be subject to a scheme chargeable payment even if borrowing is now in excess of 50% of net asset value due to falls in investment value.  However, where interest due on the original loan had not been repaid it would apply the section 182 test where such outstanding interest forms part of the new borrowing. This will apply even where the aggregate amount of borrowing including the unpaid interest is less than the original loan as highlighted in the following example.

Example

A SIPP took out a £100,000 mortgage on a property prior to A-Day. At first the interest and capital repayments were fully met and the outstanding loan was reduced to £80,000. However, the property became vacant and interest arrears built up during this period so that the loan now stands at £85,000. On re-letting the property the mortgage is moved to a new lender. In this case HMRC has confirmed that as there is £5,000 of outstanding interest on the loan, there will need to be a 50% test under s182.

Where the easement on restructuring does not apply, it is possible to switch from a ‘capital repayment’ basis to ‘interest only’ without retesting provided that the outstanding capital is not increased.

Where a loan is transferred from one pension scheme to another, then as a general rule HMRC would treat this as new borrowing and expect it to be within 50% of net asset value.  However, if the new loan is effectively a continuation of the earlier loan agreement (e.g. the loan remains with the same lender and there is no deferred interest) HMRC will consider an exception to the general rule on a case-by-case basis

Value Shifting

Any debts between the scheme and the employer or member must be repaid on commercial terms.  If not, they are treated as an unauthorised payment.

There are rules to discourage schemes from investing in financial instruments that are designed to remove value from tax-privileged funds to the member, former member, or a connected person, or to a sponsoring employer or former sponsoring employer (ie. value stripping assets).  These rules

· provide all investments must be acquired, disposed of or leased on commercial terms

· prevent the use of investments and changes to investments that allow for the value to be taken out of scheme assets

· prevent the use of annuities which provide that certain payments can be made directly or indirectly on the death of members

· provide that all loans to third parties must be on normal commercial terms.

Where value is passed from the scheme to either a member, former member, or a sponsoring employer, the amount of the value shifted out of the scheme is treated as an unauthorised payment if the amount passed is other than what can be expected on arms length terms.  A scheme sanction charge is also levied on the scheme.

It is possible to pass value from the scheme without making any payments as such.  The following example relating to a change to the rights attached to shares highlights this.

Ewan is a member of the Upton Ltd EPP scheme.  The EPP scheme owns 100% of the Class A shares in Upton Ltd, while Ewan owns 100% of the company’s Class B shares.

Both the Class A and Class B shares have similar rights but the Class A shares subsequently have their rights changed so that they no longer provide the right to a dividend.

The result is that value from the Class A shares has passed to the Class B shares and therefore to the member without any payment.  Ewan will be subject to an unauthorised member payment charge equivalent to the decrease in value of the shares held by the scheme.  The scheme will also suffer a scheme sanction charge.

It is also possible to pass value from a registered scheme through lease transactions as the following example indicates.

The Normanton Ltd SSAS owns a commercial property.  The SSAS sells the freehold of the property to Normanton Ltd for a minimal amount subject to a leaseback to the scheme for 100 years and the scheme paying a ground rent of £1 per year.  Normanton Ltd subsequently increases the rent to £10,000 per year.  Altering the rights to the lease in this way has passed the value of the property from the SSAS to Normanton Ltd.

Normanton Ltd will be subject to an unauthorised payment charge to the value of the decrease in value of the property held by the scheme.  The scheme will also suffer a scheme sanction charge.

A further example of value stripping is set out below:

Croft Ltd SSAS owns a commercial property, which is leased to the scheme member, Adrian, subject to a restrictive covenant over its use for a hazardous purpose.  The SSAS removes the restrictive covenant, which reduces the value of the asset and Adrian’s liability under the lease.  Adrian will be subjected to an unauthorised payment charge to the value of the decrease in the value of the property held by the SSAS.  The SSAS will suffer a scheme sanction charge.

The new prohibition on value stripping assets will preclude use of the Open Annuity in its pre A-Day form.

Scheme Assets used by Members

Although residential property and tangible moveable property are now heavily taxed, and would not also be subject to the benefit in kind charge on a personal use of registered scheme assets, the legislation in the Finance Act 2004 regarding the benefit in kind charge has been retained to cover those situations (likely to be very few) where such a charge is appropriate. Its provisions are as follows:-

Where a scheme member, or a member of their family or household has scheme assets provided for personal use, the cash equivalent of the benefit in kind will be charged on the member as an unauthorised payment.  This also applies where a scheme has been wound up since the investment was acquired.

For the purposes of the above the following are members of a person’s family:

• the person’s spouse
• the person’s children and their spouses
• the person’s parents, and
• the person’s dependants

The following are members of the person’s household:

• the person’s domestic staff, and
• the person’s guests

Where after the member’s death an asset held by the scheme is used to provide a benefit to a person, who, at the time of the member’s death, was a member of the member’s family or household, an unauthorised payments charge will be made on the person receiving the benefit.

The unauthorised payments charge will not apply where a member is provided with a benefit by reason of their employment, and where that benefit has already been taxed as a benefit in kind.

It should, however, be noted that an unauthorised payments charge will apply in respect of an employee earning less than £8,500 a year in respect of the employment where that individual or someone in their family or household is a director with a material interest (ie. owns 5% of the share capital or has an entitlement to 5% of the assets) in the sponsoring employer, and where the scheme concerned is an occupational pension scheme that is holding the asset providing the benefit.

The basis of the tax charge is set out in Part 3 of the Income Taxes (Earnings & Pensions) Act 2003 (ITEPA 2003).

The cash equivalent of the pension benefit in kind is generally the cost of the benefit to the scheme less any part of that cost made good by the member.  However, there are special rules for certain assets (ie. living accommodation or cars and vans and related benefits).

Where the asset provided to the member is not in one of the special cases mentioned in the above paragraph the cost of the benefit to the scheme is the higher of:

-          the annual value of the asset.  In the case of the use of land (other than living accommodation) this means its annual rental value as defined in section 207 ITEPA 2003.  This is the rent that might be expected to be obtained on a commercial letting from year to year if:

-           the tenant undertook to pay all taxes, rates and charges usually paid for by the tenant, and

-           the landlord undertook to bear the costs of the repairs and insurance and other expenses (if any) necessary for maintaining the land in a state to command the rent.

The annual value of any other asset (ie. except living accommodation, vans, cars or related benefits) is 20% of the market value of the asset (as defined by section 272 Taxation of Chargeable Gains Act 1992 as the price which those assets would reasonably be expected to fetch on a sale in the open market) as at the time the scheme first made the asset available as a pension scheme related benefit.

• the annual amount of the sums, if any, paid by the scheme by way of rent or hire charge for the asset together with the amount of any additional expenses.  It should be noted that the following additional expenses are not included:

• the expense of acquiring or producing the asset incurred by the scheme, and
• any rent or hire charge payable for the asset by the scheme which has already been taken into account in calculating the annual value.

Where a member ‘makes good’ the cost of using the asset to the scheme, this amount will be deducted from the unauthorised payments charge.  If the scheme allows the member to use an asset and charges a rent, the rental payment will be included in the sums made good.

The ‘taxable property’ provisions set out in section 2 above remove the tax advantages for self-directed pension schemes investing in residential property and tangible moveable assets. However, certain self-directed pension schemes (ie. mainly some SSASs set up pre 1991 and certain s.226 plans) had the ability under the pre A-Day rules to invest in residential property.  Transitional protection is extended to these schemes to enable them to continue to hold residential property under the new regime subject to certain restrictions (see section 5).  Because such schemes, and other, non self-directed schemes, may continue to both hold residential property under the new regime and provide benefits for members in respect of that property, the legislation relating to member benefits (ie. the benefit in kind tax charge) continues in place.

Living accommodation is accommodation that allows the person to live independently (eg with a bathroom, kitchen, food storage areas as well as a bedroom etc.)

The value of the benefit is the difference between

• the annual value of the accommodation for the taxable period, and
• any sums made good by the member to the scheme

For all UK and overseas properties held by registered schemes, the annual value is the amount of rent that would be payable if the property had been let on the open market under the terms of a commercial lease, in accordance with section 110 ITEPA 2003 (and section 106 ITEPA 2003 for properties over £75,000).

HMRC has issued the Pension Schemes (Co-Ownership of Living Accommodation) Regulations 2006 – SI 2006/133, which set out how to calculate the benefit in kind charge where there is co-ownership of a property between the pension fund and a member or a member of a member’s family or household.  The ‘living accommodation benefit’ is apportioned between the scheme (ie. the ‘pension scheme owner’s benefit’) and the member(s) (ie. ‘the private owner’s benefit’).  It is the ‘private owner’s benefit’ which will be treated as an unauthorised payment to the member by the registered scheme and which will be subject to a benefit in kind charge.

Car and Van Benefits

Where a car or van is made available to a scheme member, or a member of their family or household, and is available for private use, the member will be taxed on the use of the asset in the same way that an employee would be, if the asset were provided to them by reason of their employment.

The cash equivalent of the car and van benefits are calculated in accordance with Part 3 Chapter 6 of ITEPA 2003. However, there is a difference in relation to car fuel.  In the latter case instead of using the scale charges applied to employees, the whole payment for fuel is treated as a cash asset and will be taxed as an unauthorised payment.

Cash Assets

Any cash assets, including vouchers, use of credit cards etc made available by the scheme are treated as unauthorised payments taxable on the member.

Wasting Assets

Where a scheme makes an asset available which is used personally by a scheme member etc, and the asset is a ‘wasting asset’ a scheme sanction charge will be levied on the scheme which is equivalent to the amount of the unauthorised payment to the member.  This will be in addition to the unauthorised payments charge on the member.  A ‘wasting asset’ is defined in section 44 of the Taxation of Chargeable Gains Act 1992 and is an asset with a predictable life span not exceeding 50 years.  Plant or machinery will always be deemed to have a life span of under 50 years.  Therefore all cars (even veteran or classic cars) are ‘wasting assets’.