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TaxationWeb by Bob Fraser MBA MA FSFA

Bob Fraser MBE, MBA, MA, FPFS, TEP of Towry Law Financial Services Ltd outlines recent developments affecting pension schemes.The Government has decided that it will remove the tax advantages for investing in residential property or certain other assets such as fine wines, classic cars, art and antiques from registered pension schemes which are self directed. This is to prevent people benefiting from tax relief in relation to contributions made into self-directed pension schemes for the purpose of funding purchases of holiday or second homes and other prohibited assets for their or their family’s personal use.

The legislation will be designed to remove all tax advantages from holding prohibited assets directly or indirectly in self-directed pension schemes and will broadly mean that it is at least no more advantageous to hold such assets in a pension scheme than it is to hold them personally.
If a self-directed pension scheme directly or indirectly purchases a prohibited asset the purchase will be subject to the unauthorised member payments charge in Section 208 FA 2004. This will recoup all tax relief given on the amounts used to purchase the asset.

This means that:

• the member will be subject to an income tax charge at 40% on the value of the prohibited asset;

• the scheme administrator will become liable to the scheme sanction charge in Section 239 FA 2004, which will usually be a net amount of 15% of the value of the prohibited asset

• if the set limits are exceeded the cost of the asset may also be subject to the unauthorised payments surcharge in Section 209 FA 2004, which is a further charge on the scheme member of 15% of the value of the asset

• if the value of the prohibited asset exceeds 25% of the value of the pension scheme’s assets, the scheme may be de-registered under Section 157 FA 2004, which would lead to a tax charge on the scheme administrator on the value of the scheme assets at the rate of 40% under Section 242 FA 2004.

So, if a pension scheme purchased a prohibited asset costing £100, there could be total tax charges of £70 on the scheme and its member, and the scheme could risk being deregistered. If the scheme were deregistered, there would be a further 40% tax charge on the value of assets held in the scheme at the time of deregistration.

Pensions and tax-free cash

There have been articles in the press describing a “cunning plan” to augment pension pots by re-cycling the tax free cash back into the pension plan to generate additional tax relief. The government has announced that an anti-avoidance rule will be inserted into the new pension tax simplification legislation to prevent individuals from artificially boosting their pension funds by recycling tax free lump sums in this way, to take effect from 6 April 2006 (A-Day). The legislation will target cases where lump sums are taken with the sole or main purpose of reinvesting them in a pension scheme to create additional pensions savings through the additional tax relief granted.

Pensions and IHT

HMRC issued a consultation paper on this issue earlier in the year. The result of this consultation is due to be published in the New Year.

December 2005

Bob Fraser MBE, MBA, MA, FPFS, TEP
Chartered Financial Planner

Towry Law Financial Services Ltd
Mobile phone: 07769880476
e-mail: bob.fraser@towrylaw.com

Authorised and Regulated by The Financial Services Authority