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HMRC internal manual

Pensions Tax Manual

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International: transitional corresponding relief

Glossary PTM000001
   

 

Transitional corresponding relief for individuals on own contributions
Transitional corresponding relief for individuals in respect of employer contributions
Transitional corresponding relief for employers

Where contributions to overseas schemes were paid and relieved in the tax year 2005-2006, both individuals and employers may continue to claim tax relief on contributions made to the same or in some cases replacement overseas pension scheme if certain conditions are met.

Where tax relief has been given the individual member can be liable to UK tax charges in respect of pension savings made under the scheme and payments made by the scheme. These tax charges are:

  • the annual allowance charge - see PTM113300,
  • the lifetime allowance charge - see PTM113400,
  • the member payment charges - see PTM113200.

Transitional corresponding relief for individuals on own contributions

Paragraph 51 Schedule 36 Finance Act 2004

Contributions made by an individual to an overseas scheme may qualify for relief if:

  • they received “corresponding relief” on contributions that they made to that scheme in the 2005-2006 tax year,
  • HMRC is satisfied that the conditions in section 355 Income Tax (Earnings & Pensions) Act 2003 are met, and
  • the scheme manager provides information about the individual’s benefit crystallisation events as set out at PTM111800.

The first condition will still be met if after 5 April 2006 there has been a block transfer (see PTM062240) from the overseas pension scheme to which the individual contributed in the 2005-2006 tax year to the overseas pension scheme to which they are contributing at any time after 5 April 2006. That is to enable individuals to continue receiving relief if they are required to transfer to a new overseas pension scheme because of a company take-over or reorganisation. The new scheme must correspond to a UK registered pension scheme.

So far as the second condition is concerned, this should mean that an individual who received “corresponding relief” in the 2005-2006 tax year can receive transitional relief in any subsequent tax year. A scheme that was regarded by HMRC as corresponding to an approved pension scheme immediately before 6 April 2006 will still be accepted as corresponding in subsequent tax years. But that is subject to the condition that any rule changes made after 5 April 2006 (but not the aspects of the scheme’s rules that have not changed) must meet the test of corresponding to a registered pension scheme. Scheme managers do not have to apply to HMRC to determine whether or not that test is met where such a rule change is made. However, they should notify HMRC of rule changes.

Where an individual has a right to retire earlier than age 55 under their corresponding scheme’s rules they will retain that entitlement provided it was in place before 10 December 2003. The minimum pension age possible for corresponding schemes established between 10 December 2003 and 5 April 2006 is age 55 for members who retire after 5 April 2010. Individuals who join a ‘corresponding scheme’ after 5 April 2006 will not be eligible for transitional relief, but they will receive migrant member relief if the relevant conditions are met.

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Transitional corresponding relief for individuals in respect of employer contributions

Article 17 The Taxation of Pension Schemes (Transitional Provisions) Order 2006 - SI 2006/572

An employee will be exempt from tax in respect of contributions made to an overseas pension scheme by their employer as if:

  • the scheme were a qualifying overseas pension scheme (see PTM111400) and
  • the contributions were relevant migrant member contributions(see PTM111300).

The exemption only applies provided the following conditions are met:

  • the employee was exempted from income tax under section 390 Income Tax (Earnings and Pensions) Act 2003 (ITEPA) (repealed from 6 April 2006) in relation to contributions made between 6 April 2005 and 5 April 2006 by an employer under the scheme,
  • the scheme manager provides the same information about the individual’s benefit crystallisation events as described at PTM111800, and
  • HMRC is satisfied that the scheme corresponds to a registered pension scheme.

The first condition will still be met if there has been a block transfer after 5 April 2006 from the overseas scheme to which the employer contribution was made in respect of the individual in the 2005-2006 tax year to the overseas scheme to which the employer is contributing in respect of the individual at any time after 5 April 2006. PTM062240 provides guidance on what is a block transfer.

A scheme that was regarded by HMRC as corresponding to an approved pension scheme immediately before 6 April 2006 will meet the third condition providing that any rule changes made after 5 April 2006 (but not the aspects of the scheme’s rules that have not changed) meet the test of corresponding to a registered scheme. Scheme managers are not required to apply to HMRC to determine whether or not that test is met where such a rule change is made. However, they should notify HMRC of rule changes.

The individual is entitled under section 308A ITEPA to exemption from an income tax charge under section 62 ITEPA if money’s worth is provided to the individual by their employer’s contributions (that is where the payments meet the employee’s pecuniary liability). The individual is also protected by section 307 ITEPA from an income tax charge under Chapter 10 Part 3 ITEPA on any other benefit provided by those contributions.

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Transitional corresponding relief for employers

Articles 15 to 16 The Taxation of Pension Schemes (Transitional Provisions) Order 2006 - SI 2006/572

Transitional relief is available to employers for contributions made by them at any time after 5 April 2006 if the following conditions are met:

  1. HMRC allowed contributions made by the employer between 1 April 2005 and 5 April 2006 to an overseas scheme for the benefit of an employee of theirs to be deducted in accordance with section 76(6A) and 76(6C) of Finance Act 1989, either:
* for the purposes of Case I or Case II of Schedule D,
* in respect of management expenses under section 75 ICTA,
* in respect of the expenses of an insurance company under section 76 ICTA, or
* in respect of profits of a trade, profession or vocation chargeable under section 5 of the Income Tax (Trading and Other Income) Act 2005.
  1. after 5 April 2006 the employer makes contributions to the same pension scheme for the benefit of the same employee,
  2. the scheme manager provides HMRC with the same information about the employee’s benefit crystallisation events as would be required if the individual was a relevant migrant member of a qualifying overseas pension scheme (see PTM111300 and PTM111400), and
  3. HMRC is satisfied that the scheme corresponds to a registered pension scheme

The second condition will be met if after 5 April 2006 there has been a block transfer (see PTM062240) involving the transfer of the employee’s rights from the overseas pension scheme mentioned in the first bullet, to the overseas pension scheme to which that employer is contributing at any time after 5 April 2006. This is to enable an employer to continue receiving relief if the employee has to transfer to a new overseas pension scheme because of a company take-over or reorganisation.

A scheme that was regarded by HMRC as corresponding to an approved pension scheme immediately before 6 April 2006 will meet the last condition above providing that any rule changes made after 5 April 2006 (but not the aspects of the scheme’s rules that remain unchanged) meet the test of corresponding to a registered scheme. Scheme managers do not have to apply to HMRC to determine whether or not that test is met where such a rule change is made. However, they should notify HMRC of rule changes.

If the transitional relief conditions are met, article 15 of The Taxation of Pension Schemes (Transitional Provisions) Order 2006 No 572 - provides for the contributions to be treated as if they were relevant migrant member contributions. Relevant migrant member contributions are those made to a qualifying overseas pension scheme (see PTM111400) in respect of an employee who is a relevant migrant member of the scheme (see PTM111300). Contributions are allowed as deductions under section 196 Finance Act 2004 to the extent that they are paid and would be allowable under the normal rules for relief for registered pension schemes (see PTM043200). Paragraph 2(2) of Schedule 33 Finance Act 2004 applies Section 200 Finance Act 2004 to such notional migrant member contributions as if the reference there to contributions under a registered pension scheme included the notional migrant member contributions. In addition, section 245 Finance Act 2004 is modified by article 16 of SI 2006/572 to exclude such contributions from schedule 24 to the Finance Act 2003 and so prevent a possible double deduction for the employer in respect of the same contributions.