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HMRC internal manual

Pensions Tax Manual

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HM Revenue & Customs
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Unauthorised payments: deemed or specific situations that are unauthorised payments: value shifting

Glossary PTM000001
   

General
Securities
Lease transactions
Removal of rights or restrictions
Transactions where no unauthorised payment charge arises

General

Section 174 Finance Act 2004

There are many types of transaction which may be entered into by a registered pension scheme which have the effect of shifting value from the scheme to:

  • a person who is, or has been, a scheme member or a connected person (see PTM027000) or
  • to a person who is, or has been, a sponsoring employer.

Value may be shifted by either increasing the value of an asset, or decreasing a liability of a scheme member or sponsoring employer without actually creating a payment.

Where value is passed from the scheme to either a member (or a person who has been a scheme member) or a sponsoring employer (or a person who has been a sponsoring employer), and the amount passed is other than what can be expected on arm’s length terms, then:

  • the amount of the value shifted out of the scheme is treated as an unauthorised payment and
  • a scheme sanction charge will also be made on the scheme

Where a scheme enters into a transaction that increases the value of an asset, or decreases the amount of a liability, of a person connected with:

  • a member, or
  • a former member, or
  • a sponsoring employer, or
  • a former sponsoring employer, or
  • was connected with a member, or former member on the date of the death of the member or former member

the increase in the value of the asset, or decrease in liability will be treated as for the benefit of the member, the former member, the sponsoring employer, or the former sponsoring employer (as the case may be).

PTM027000 sets out what is meant by a connected person.

For a definition of ‘sponsoring employer’ see PTM022000 

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Securities

It is possible to pass value from the scheme without making any payments as such. Probably the simplest example is any change to the rights attached to shares.

Example

Andrew is a member of ABC Ltd Retirement Benefits Scheme.

ABC Ltd RBS owns 100% of the class A shares in ABC Ltd.

Andrew owns 100% of the class B shares in ABC Ltd.

Both the class A shares and the class B shares have similar rights but the class A shares subsequently change their rights so they no longer have the rights to dividends.

The result is that the value from the class A shares has passed to the B shares and therefore to the member without any payment.

Andrew will be subjected to an unauthorised payment charge equivalent to the decrease in value of the shares held by the scheme. The scheme will also be liable for a scheme sanction charge.

Find more details about sponsoring employer investments at PTM122000 

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Lease transactions

It is also possible to pass value from a registered pension scheme through lease transactions.

Example

XYZ Ltd Retirement Benefit Scheme owns a property.

The scheme sells the freehold of the property to XYZ Ltd (the sponsoring employer) for a minimal amount subject to a leaseback to the scheme for 100 years and the scheme paying a ground rent of £1 per year.

XYZ Ltd subsequently increases the rent to £10,000 per year.

Altering the rights to the lease in this way has passed the value of the property from the scheme to XYZ Ltd.

XYZ Ltd will be subjected to an unauthorised payment charge to the value of the decrease in value of the property held by the scheme. The scheme will also be liable for a scheme sanction charge.

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Removal of rights or restrictions

It is possible to pass value out of a registered pension scheme where the value of an asset held by a scheme is diminished or the liability of the scheme is increased because a right or restriction over the asset or liability is removed.

Example

JKL Ltd Pension Scheme owns a property, which is leased to the member, Barry, subject to a restrictive covenant over its use for a hazardous purpose.

The scheme removes the restrictive covenant, which in turn reduces the value of the asset and Barry’s liability under the lease.

Barry will be subjected to an unauthorised payment charge to the value of the decrease in value of the property held by the scheme. JKL Ltd Pension Scheme will also be liable for a scheme sanction charge.

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Transactions where no unauthorised payment charge arises

Where a transaction takes place that transfers value from the registered pension scheme but the amount does not differ from an arm’s length transaction, no unauthorised payments charge will be created.

Example

KK Ltd Registered Pension Scheme leases a property from the employer KK Ltd. The lease is subject to a normal commercial rental review. This review may reduce the value of the lease but any such drop in value would not create a charge if it is on commercial arm’s length terms.