A significant issue for the pensions industry is HM Revenue & Customs’ (HMRC) stance on in-specie contributions, which is causing confusion and delays, and potentially leading to poor consumer outcomes.
A major attraction of making a contribution to a pension scheme is the tax relief granted on that contribution. For personal contributions to a self-invested personal pension (Sipp), tax relief will come via Relief at Source arrangements, whereby the Sipp provider will claim basic rate relief from HMRC and add the amount received to the Sipp. A higher-rate taxpayer can then claim further tax relief direct from HMRC.
Dealing with cash contributions is a relatively straightforward process, but when using an asset to make a tax-relievable contribution it becomes something of a mess.
The issue
The problem stems from HMRC’s stance that the wording of the Finance Act 2004 means only cash contributions are tax-relievable. This became apparent to the industry in 2007.
Surely there was a way that would allow, for example, Mrs Smith, who personally holds £5,000 worth of windfall Barclays shares from the Woolwich Building Society buyout, to move those shares into her Sipp as a tax-relievable contribution without having to sell the shares to receive cash, use the cash to make a contribution, then repurchase the shares via the Sipp? If not, then extra costs and time out of the market are issues.
Using general legal principles as opposed to any specific pensions legislation, it was concluded with HMRC that there was indeed a mechanism to avoid the sale and repurchase route (see Box 1). This somewhat cumbersome debt mechanism served a useful purpose, up until last year.
In April 2016 the buffers were hit. HMRC introduced new questions on the Relief At Source claim forms, which for the first time allowed it to readily identify claims that included contributions made via the debt mechanism. HMRC inspected the debt mechanism used by providers and found it wanting to the extent of refusing the tax relief claim.
This opened up the prospect of HMRC challenging previous Relief At Source claims that could result in it reclaiming the tax relief already paid.
The consequences
Consequently, the Sipp industry has generally stopped accepting new in-specie contributions.
There is a perception that HMRC is troubled by the use of difficult-to-value assets to settle the debt. Replace Mrs Smith’s Barclays shares with some unquoted shares, and, while supported by a valuation for £5,000, their true market value is subjective and can be challenged by HMRC’s Share Valuations Office.
Add in the risk of deliberate malpractice to use inflated values and HMRC’s concerns look more plausible.
The solution?
Eliminating the risk by stopping all in-specie contributions is not a good solution. Much has changed since 2004, the rapid development of investment platforms allows management of investments across varying tax wrappers.
Making a tax-relievable contribution into the Sipp wrapper from a general investment account or Isa wrapper should be a straightforward process, but is thwarted by the cash-only requirement. Yes, platforms can employ a ‘Bed and Sipp’ process to sell and repurchase assets slickly, but movement from off-platform Isas to Sipps risks time out of the market and additional costs.
Pensions legislation must be brought up to date, so it is clear tax-relievable contributions can be made in the form of cash or by the transfer of specified readily valued-listed assets, avoiding the need for an artificial debt mechanism.
As for other assets, it would be beneficial to have a solution for UK commercial property to avoid the physical sale and repurchase expenses, but otherwise perhaps a tradeoff can be accepted: hard to value assets cannot be used for in-specie contributions or settlement of cash contribution debt.
Robert Graves is head of pensions technical services at Rowanmoor
