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HMRC internal manual

Pensions Tax Manual

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HM Revenue & Customs
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Investments: essential principles

Glossary PTM000001
   

Restrictions and tax rules on registered pension scheme investments
Member directed pension scheme
Tax reliefs for registered pension scheme investments
Registered pension scheme - trade and transactions
Taxable property - tangible moveable property
Taxable property - residential property
Commercial Property
Tax rules regarding investments held by overseas schemes
Tax charges on investments

Restrictions and tax rules on registered pension scheme investments

Although the tax rules for registered pension schemes do not impose any restrictions on the types of asset a pension scheme can invest in, there are tax charges in relation to certain types of investment - for example, those aimed at taking value out of the pension scheme. There are also tax consequences if a pension scheme invests in “taxable property” which includes residential property and tangible assets that are moveable. The pension scheme will of course need to comply with any relevant Department for Work and Pensions, Financial Conduct Authority and other general restrictions outside of tax law.

The investments a registered pension scheme can make will depend on:

  • the rules of the scheme
  • commercial decisions made by the people who run the scheme (usually the trustees or administrator)
  • directives from the European Union
  • HMRC rules
  • other laws.

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Member directed pension scheme

Some schemes, for example Self Invested Personal Pension Schemes (SIPPs), and Small Self-Administered Schemes (SSAS) allow the member to direct how contributions are invested. Members may make choices about what assets are bought, leased or sold and decide when those assets are acquired and sold.

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Tax reliefs for registered pension scheme investments

Section 186 Finance Act 2004

Investments by registered pension schemes qualify for various tax exemptions - the most important tax exemptions are:

  • income derived from investments or deposits held for the purpose of a registered pension scheme is exempt from income tax
  • any gain arising from the disposal of investments held for the purposes of the scheme is exempt from capital gains tax (section 271 Taxation of Chargeable Gains Act 1992).

Income includes relevant stock lending fees received by a registered pension scheme deriving from investments held for the purposes of the scheme.

Investments held for the purpose of a registered pension scheme include futures contracts and options contracts.

A relevant stock lending fee in relation to an investment is defined in section 129B Income and Corporation Taxes Act 1988 as any amount that has the nature of a fee which is payable in connection with any stock lending arrangement relating to investments that, but for any transfer under the arrangement, would be investments held for the purposes of the registered pension scheme. The meaning of stock lending arrangement is defined in section 263B Taxation of Chargeable Gains Act 1992.

This allows the stock lending fee to qualify for tax relief on the basis of it being income in respect of an investment held for the purpose of a registered pension scheme even though, in strictness, the investment in question (the stock) is temporarily held by someone else during the course of the stock lending arrangement.

A contract is not prevented from being a futures contract or an options contract if full settlement of all obligations is made by a lump sum payment rather than a transfer of assets.

Income derived from transactions relating to futures contracts and options contracts held for the purpose of a registered pension scheme is regarded as being derived from those contracts and is also exempt from income tax under the exemptions described above. A gain arising from the disposal of futures contracts or options contracts is exempt from capital gains tax.

Also, underwriting commissions applied for the purpose of a registered pension scheme which are not relevant foreign income and which would otherwise be chargeable under Chapter 8 of Part 5 Income Tax (Trading and Other Income) Act 2005 are exempt from income tax.

The exemptions from tax described above do not apply to income or gains derived from investments or deposits held as a member of a property investment Limited Liability Partnership.

A property investment Limited Liability Partnership is defined in section 1004 of the Income Tax Act 2007 as a limited liability partnership -

(a) whose business consists wholly or mainly in the making of investments in land, and

(b) the principal part of whose income is derived from investments in land.

Taxable property (such as tangible moveable property or residential property) held in an investment-regulated pension scheme is subject to certain tax charges (see PTM125000).

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Registered pension scheme - trade and transactions

A registered pension scheme can trade but the trading stock is not classed as an investment for tax purposes and income derived from trading is not investment income or income from deposits. This means that the tax exemptions (including those relating to capital gains on assets used by a scheme for trading purposes) set out above do not apply to the carrying on of a trade. So a registered pension scheme is liable to pay tax on any income from trading.

Whether a transaction is trading is a question of fact and HMRC will not normally give a view on this in advance of a transaction being carried out. The person or persons responsible for the tax affairs of a registered pension scheme, for example the trustees, must include trading income on the scheme’s Self-Assessment Tax Return. More information on trading can be found in the Business Income Manual (external users please refer to https://www.gov.uk/government/collections/business-income-manual-bim)

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Taxable property - tangible moveable property

Section 174A and Paragraph 6 Schedule 29A Finance Act 2004

Tangible moveable property held directly or indirectly by an investment-regulated pension scheme is subject to certain tax charges. These are things that you can touch and are moveable. Examples are art, antiques, jewellery, fine wine, boats, classic and vintage cars, but also include certain plant and machinery owned by a registered pension scheme.

For more information about direct and indirect holding of taxable property and the associated tax charges see PTM125300 (direct holding) or PTM125400 (indirect holding).

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Taxable property - residential property

Section 174A and Paragraph 6 Schedule 29A Finance Act 2004

Residential property held directly or indirectly by an investment-regulated pension scheme is subject to certain tax charges.

Property is residential if it is used or suitable to be used as a dwelling. Land that is used in connection with a dwelling (such as a garden) and other buildings such as care homes and hotels may also be residential property. More detailed guidance is at PTM125200.

If a registered pension scheme is to hold a buy to let residential property or holiday home or any other type of residential property then in addition to the taxable property tax charges for investment regulated schemes there may be other tax consequences:

  • If the property is made available to a member of the scheme or members of their family it will give rise to a benefits in kind tax charge if a market rent is not paid (even if they choose not to use it), unless the property is taxable property held in an investment-regulated pension scheme, in which case there are different taxing provisions (see PTM125300 if the taxable property is held directly and PTM125400 if it is held indirectly).

For more information about direct and indirect holding of taxable property and the associated tax charges see PTM125300 (direct holding) or PTM125400 (indirect holding).

See PTM133900for details about the benefits in kind tax charge for cases not involving taxable property.

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Commercial Property

A sponsoring employer or member of a scheme could rent a property owned by the pension scheme but would have to pay the commercial rent due on the property. Failure to pay the commercial amount of rent for the property would lead to an unauthorised payment tax charge on an amount equivalent to the shortfall.

If a building includes a shop with a wholly separate flat above, it is treated as two separate buildings. The flat is a residential property and the shop is a commercial one. A flat is wholly separate if it has a separate entrance and has no inter-connection with other parts (for this purpose a communal hallway is not an inter-connection).

If a building comprises part which is used for commercial purposes, such as a shop, with an inter-connected residential area, such as a flat, this is one building and the whole will be treated as residential as it is suitable for use as a dwelling. Different parts of a building are inter-connected if they share a common entrance and where you can move from one part to another without moving through common areas.

Where a commercial property with no residential element owned by a registered pension scheme is converted to residential use whilst it is in the course of construction, conversion or adaptation such land and property is not residential property because during that period it is not suitable for use as a dwelling.

Land and buildings being converted are treated as residential property from the point when they become suitable for use as a dwelling. In any specific case this point should be determined by taking a common sense approach to the facts and circumstances. Essentially the question to be answered is: - would a person normally live in that dwelling? The point at which this occurs will normally be when the works are substantially completed. In the case of UK property this is likely to be when the certificate of habitation or certificate of completion is issued.

A property that is sold before the development or conversion is substantially completed never becomes residential property.

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Tax rules regarding investments held by overseas schemes

Paragraph 7A Schedule 34 Finance Act 2004 and The Pensions Schemes (Application of UK Provisions to Relevant Non-UK Schemes) Regulations 2006 - SI2006/207 (as amended by SI2006/1960)

There are some special provisions covering both:

  • relevant non-UK schemes
  • ‘transfer members’ of those schemes.

The Pension Schemes (Application of UK Provisions to Relevant Non-UK Schemes) Regulations 2006 apply an unauthorised payments charge in certain circumstances where an individual’s funds under a registered pension scheme have been transferred into an overseas pension scheme that is both a relevant non-UK scheme and an investment-regulated pension scheme (see PTM125200). A relevant non-UK scheme is, broadly, an overseas pension scheme which after 5 April 2006 has received UK tax-relieved contributions and/or a transfer of UK tax-relieved funds (see PTM113000). The individual is a “transfer member” of the overseas scheme where funds under a registered pension scheme have been transferred into the overseas scheme (whether directly or indirectly via another relevant non-UK scheme), and will have a taxable asset transfer fund under that scheme. Further guidance is provided in the International chapter see PTM113000 to PTM114000.

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Tax charges on investments

The main tax charges to consider in relation to a scheme’s investment activity are:

The Unauthorised Payments Charge

Section 208 Finance Act 2004

This equates to 40% of the amount of any unauthorised payment. It is the member or in some instances the sponsoring employer who is accountable for this charge. Below are some examples:

Loans

A registered pension scheme should not make a loan to a member (see PTM123300). This includes a “debt waiver” see PTM123100. If a member does receive a loan from a registered pension scheme, the whole amount of the loan is treated as an unauthorised payment.

Sale or purchase of an asset

If a registered pension scheme sells an asset to a sponsoring employer, member or a connected party, or buys an asset from them, the price paid should be an amount which might be expected to be paid to a person who was at arm’s length.

If a registered pension scheme buys an asset for more than it is worth, or the scheme sells an asset for less than it is worth, the difference between the amount paid and the market value is treated as an unauthorised payment.

For further details see the guidance on connected party transactions at PTM027000.

Benefit in kind

Registered pension schemes can generally invest in any asset, so sometimes a member may be able to use an asset belonging to the scheme, for example living accommodation or vehicles. The cash equivalent of this “benefit in kind” is an unauthorised payment. (These rules do not apply where the scheme is an investment regulated pension scheme and the asset is taxable property).

This cash equivalent is calculated in the same way as if an employer were providing the benefit in kind to an employee. This includes deducting from the unauthorised payment any amount paid by the member to the scheme for the use of the asset.

For further details see the guidance on benefits in kind at PTM133900.

Value shifting

If a change in a registered pension scheme investment means that the value moves from the scheme to the member without actually creating a payment, the amount of the value shifted out of the scheme may still be treated as an unauthorised payment.

For further details see the guidance on value shifting at PTM133700 For more information on the unauthorised payments charge see PTM130000.

A Scheme Sanction Charge

Section 239 Finance Act 2004

This is a separate tax charge of 40% on any unauthorised payment (see above) and is charged on the scheme administrator. Where an unauthorised payments charge has already been paid in relation to the transaction that has given rise to this charge, a deduction on the scheme sanction charge will be due. This will be the lesser of 25% of the unauthorised payment and the amount of the unauthorised payments charge paid by the member or employer on the unauthorised payment.

For more information on the scheme sanction charge see PTM135000

An Unauthorised Payments Surcharge

Section 209 Finance Act 2004

Where the amount of the unauthorised payment to the member or employer reaches the surcharge threshold there is an additional charge payable by the member or employer. This is a 15% charge.

For more information on the unauthorised payments surcharge see PTM134000

A Scheme De-registration Charge

Section 242 Finance Act 2004

This is 40% of the aggregate of the sums held for the purposes of the pension scheme immediately before it ceased to be a registered scheme and the market value of any assets held for the purposes of the scheme.