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In response to representations received, HMRC have published a statement regarding the reattribution of inherited estates and payments to pension policyholders.

Under the simplified pensions tax regime, which came into force from 6 April 2006, tax relieved funds held in a pension scheme should be used to provide for an income in retirement. This means that certain payments made out of tax subsidised pension savings, which inappropriately reduce the amount of savings available to provide a pension in retirement, are subject to tax charges designed to re-coup the tax reliefs related to them – these are commonly referred to as ‘unauthorised payments’ charges. In addition, under the new regime specified types of payment are excluded from being subject to the unauthorised payments tax charge, which may, for example, be used where the specific type of payment does not actually result in any diminution in value of the fund available to provide for a pension in retirement.

HMRC have received representations on the tax treatment of certain payments made to those holding with-profits policies to facilitate the reattribution of ‘inherited estates’ – which is defined in the Conduct of Business sourcebook issued by the Financial Services Authority, as an amount representing the fair market value of the with-profits assets, less the realistic value of liabilities of a with-profits fund.

Where such payments are made to those holding with-profits policies as part of a pension arrangement, an unauthorised payments charge may arise. Where, however, such a payment does not diminish the value of the funds held within a pension scheme, and is made to protect policyholders’ interests, the Government does not believe that the payment should be subject to an unauthorised payments tax charge.

Proposals are now being put forward to amend the pensions tax legislation to relieve payments made in conjunction with a reattribution mechanism which involves the application of Part 7 of the Financial Services and Markets Act 2000 (transfers of insurance business) from the unauthorised payments tax charge.

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HMRC: Reattribution of inherited estates & payments to pension policyholders