Employment income provided through third parties: exclusions: retirement benefits etc
Section 554W ITEPA 2003
In summary, Section 554W shelters from Part 7A certain lump sums paid from certain schemes where the lump sums are paid out of rights accruing before 6 April 2011.
Such lump sums remain chargeable to income tax as employment income under Section 394 ITEPA 2003.
There is an illustrative example in EIM45640.
Three conditions must be met. They are bulleted below.
- A ‘relevant benefit’ is provided under a ‘relevant scheme’ by way of a payment of a lump sum wholly out of rights which A has under the scheme.
- A’s rights out of which the lump sum is paid are, wholly or partly, ‘pre-6 April 2011 lump sum rights’.
- The payment of the lump sum is a relevant step within Section 554C.
If those conditions are met, the relevant step does not give rise to Part 7A income.
‘Relevant benefit’ has the same meaning as in Part 6 Chapter 2 ITEPA 2003 (EFRBS). See EIM15021.
There are two types of ‘relevant scheme’. They are bulleted below.
- An EFRBS within the meaning of Part 6 Chapter 2 ITEPA 2003.
- A superannuation fund to which Section 615(3) ICTA 1988 applies.
Pre-6 April 2011 lump sum rights
‘Pre-6 April 2011 lump sum rights’ are rights which:
- accrued before 6 April 2011, and
- are specifically to receive relevant benefits by way of lump sum payments.
Section 5544W uses the concept of ‘pre-6 April 2011 lump sum rights’ to prevent people from obtaining an exclusion from Part 7A income by converting rights to non-relevant benefits held before 6 April 2011 into rights to relevant benefits on or after that date.
The term ‘rights’ includes both actual rights and prospective rights.
Suppose a member has the actual or prospective right to receive relevant benefits at 5 April 2011 and may receive them in the form of a lump sum:
- under a member’s election, or
- at the option or discretion of the trustee.
Then the intention is that the future lump sum relevant benefits received under the scheme will be excluded from Part 7A income to the extent that the rights to receive them accrued before 6 April 2011.
But this is on condition that the election, option or discretion:
- could have been exercised at 5 April 2011, or
- could have been exercised at that date had the member met the sufficient conditions (for example, around age).
If A’s rights out of which the lump sum is paid are partly but not wholly pre 6 April 2011 lump sum rights, you treat the relevant step as being two relevant steps:
- one in relation to the lump sum so far as it is paid out of rights which are pre 6 April 2011 lump sum rights, and
- one in relation to the lump sum so far as it is paid out of rights which are not pre 6 April 2011 lump sum rights.
And you then apportion the sum of money or asset which is the subject of the relevant step on a just and reasonable basis between those two relevant steps.
Section 554W only shelters the former.
What counts as a just and reasonable basis will depend on the facts of the case.
In general, you can take investment returns from funds held on 5 April 2011 into account when valuing the relevant step treated as relating to the lump sum paid out of pre-6 April 2011 lump sum rights.
Implications for the anti-forestalling rules
If a lump sum relevant benefit is paid before 6 April 2011, it will come within Section 554W and so the anti-forestalling rules will not apply.
Section 394 ITEPA 2003 will apply to it instead. See EIM15015.
On the anti-forestalling rules, see EIM45905 onwards.
How Sections 554T to 554X are related
Sections 554T, 554U, 554V, 554W and 554X are exclusions relating to retirement benefits etc.
To the extent that they apply, you apply them in that order.
On Section 554T (employee pension contributions), see EIM45615.
On Section 554U (pre-6 April 2006 contributions to EFRBS), see EIM45620.
On Section 554V (purchases of annuities out of pension scheme rights), see EIM45625 onwards.
On Section 554X (transfers between certain foreign pension schemes), see EIM45645 onwards.