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HMRC internal manual

Pensions Tax Manual

Investments: loans - general principles

Glossary PTM000001
   

Loans
Meaning of loan
Guarantees
Debts
Third party loans

Loans

Subject to Department for Work and Pensions (DWP) legislation, a loan made by a registered pension scheme which is an occupational pension scheme to a person who is or has been a sponsoring employer will (subject to certain conditions) be an authorised employer payment. All schemes may make loans to third parties but loans to members (or those connected to members) will be taxed as an unauthorised payment (see PTM123300). All loans are only authorised payments if they are genuine investments of pension schemes. They should be prudent, secure and on a commercial basis.

Meaning of loan

Section 162(2) Finance Act 2004

The legislative restrictions that apply to loans to sponsoring employers (section 179 Finance Act 2004) do not apply to loans made to the market generally. For example a large scheme may want to buy corporate bonds issued by the employer

In accordance with section 162 Finance Act 2004, the following are not classed as loans, and are not subject to the legislation relating to employer loans, if they are listed or dealt in on a recognised stock exchange (within section 1005 Income Tax Act 2007) or offered to the public

  • debentures
  • debenture stock
  • loan stock
  • bonds
  • certificates of deposit
  • other instruments relating to the owing of monies.

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Guarantees

Section 162(3) Finance Act 2004

Where a registered pension scheme makes a guarantee of a loan, it is considered to be taking the same risk in economic terms as lending the money directly. For this reason any guarantee made by the scheme to:

  • a person who is, or has been, a sponsoring employer or
  • a person who is, or has been, a member of the scheme, or
  • a person who is connected to the person who is, or has been, a sponsoring employer or member,

will be treated as a loan and will be subject to the corresponding legislative restrictions set out at PTM123200 (loans to sponsoring employers) or PTM123300 (loans to members) as appropriate.

The amount of the loan will be equal to the amount guaranteed by the scheme.

If the guarantee does not meet the conditions to be an authorised employer loan then the loan will be taxed as an unauthorised payment - see PTM121000.

For more information on connected person see PTM027000

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Debts

Section 162(4) and (5) Finance Act 2004

A debt may be created which has not arisen through the lending of money. For example, a registered pension scheme may sell an asset to a scheme member or a person who is connected with a scheme member, but that member may not pay for the asset straight away. There has been no lending of money by the scheme but a debt has been created between the scheme and the member.

Where such debts are repaid on arm’s length terms they will not be treated as a loan. There must be no preferential treatment given to the sponsoring employer, member, or connected person when enforcing the collection of the debt.

For example if the sponsoring employer is in financial trouble and having problems repaying its creditors any debt to the pension scheme must be repaid on the same terms as similar debts to other creditors.

Where a debt is created which is not repaid on arm’s length terms, it will be treated as a loan in accordance with section 162 (4) and (5) Finance Act 2004.

Where a debt is created between a registered pension scheme and a scheme member, which is not repaid on arm’s length terms, the amount of the debt will be taxed as an unauthorised payment.

Where a debt is created between a registered pension scheme and the sponsoring employer, no charge will arise providing that the loan conformed to the rules on loans to employers (see PTM123200).

For more information on connected persons see PTM027000.

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Third party loans

There is no objection to a registered pension scheme making loans to third parties i.e. persons not connected to members or sponsoring employers. Such loans are normally on an arm’s length basis at a market rate.