My previous blog prompted a number of comments from business owners who are interested in using their pension funds more creatively and creating wealth independent of their business.
I trust that this blog will answer these queries.
When does the property pass to the pension scheme?
In example 2 of that article, Toybox Ltd transferred a commercial property to a registered pension fund as an in-specie contribution on behalf of the directors.
There is some confusion over the date on which such an in-specie transfer to a SIPP is considered to have taken place. Where the transfer is made close to the end of the input period for the SIPP (usually 5 April), or close to the end of the company’s accounting period, a misunderstanding over the contribution date could mean that the transaction falls into the wrong period. This could lead to tax relief being delayed or denied for the contribution.
An in-specie contribution to a registered pension scheme is a complex process and is best handled by someone who has experience of dealing with this process. Do not rely upon the advice given by professional trustees, they may have a level of documentation that suits their processes but may not properly protect the client.
In addition it is generally known that pension fund trustees can confirm in advance whether a generic class of assets would be suitable to be transferred into the pension scheme, but they cannot give a promise to accept a specific asset before the monetary debt in the first step has been fixed. So ensure you take specialist advice.
If the value of the assets accepted does not match the monetary debt, any under-payment must be made up by the member or employer who has promised to make the contribution.
Harrow Ltd promises to make a contribution of £500,000, to be satisfied by a commercial premises valued at £495,500, and £4,500 in cash.
The date of payment of the in-specie contribution, the contribution date, is the date the asset has been irrevocably disposed of by the member or employer who makes the contribution. For a transfer of stocks or shares this will be the trade date, ie, the date the stock transfer form is signed. For property transactions this will be the date of exchange of an unconditional contract. The completion date for the transfer of property is irrelevant; as is the date the pension fund trustees annotate the transfer of the asset in the records of that fund.
A significant delay in the conveyance of a property to the pension scheme trustees can cause a number of problems. The asset’s market value, as determined by TCGA 1992, s. 272, may have changed, and the original valuation may be out of date. It is the asset’s value on the contribution date that is deducted from the existing debt. Where the value has fallen, the contributor must make up the shortfall.
In example 1, the property originally estimated to be worth £495,500 may have dropped in value to £405,000. In this case Harrow Ltd is obliged to find £95,000 in cash to fulfil their commitment to pay the contribution of £500,000.
Any increase in value over the amount promised as a contribution should be returned by the pension trustees either in cash, or if the assets are devisable, as a reverse in-specie by transferring shares. The contributor may then decide to pay the excess amount to the pension fund as an additional contribution, but this must strictly be an entirely separate transaction from the transfer of the property.
The pension fund trustees can only claim tax relief on the contribution from the contribution date. This is also the date on which the capital gain or loss will be calculated for the contributor. The date of acceptance of the promise to pay the contribution is not a valid date for the tax regulations.
SDLT on a property transfer becomes due when a land transaction contract is substantially performed, and this will normally be on the completion date when the acquirer takes possession of the property. However, if the acquirer takes possession before the completion date, that is the relevant date for SDLT. This removes the old stamp duty avoidance trick of ‘resting on contract’.
Restrictions on losses
In example 1 of my previous article I suggested that Barry could transfer his portfolio of quoted shares into his SIPP as an in-specie contribution. As the total value of the portfolio was less than the original cost, Barry made a capital loss on this transaction.
A reader queried whether Barry, as a beneficiary of the SIPP, would be connected to the trustees of the SIPP, within the definition of TCGA 1992, s. 286(3)(a): ‘A person, in his capacity as a trustee of a settlement, is connected with —
a) any individual who in relation to the settlement is a settler..’.
‘Settlement’ for this purpose has the same meaning as in ITTOIA 2005, s. 620.
The implication of a transaction between connected persons is that the loss created becomes what HMRC call a clogged loss. The use of clogged losses is restricted by TCGA 1992, s. 18(3), such that they can only be used against profits arising from transactions between the same connected persons in the same tax year, or from transactions between the same persons in a later year, while they are still connected.
Although a SIPP and other registered pension funds have trustees, HMRC do not consider registered pension funds to be settlements for the purposes of income tax (ie, for ITTOIA, s. 620). This is because, since a contribution to a pension fund does not involve an element of ‘bounty’, the person who makes the contribution is not a settlor in relation to the fund (see HMRC CG Manual, para CG14596).
As Barry is not a settlor in relation to the SIPP trustees, the transaction between those two parties is not a connected party transaction, and HMRC state that the availability of the losses is not restricted by TCGA 1992, s. 18(3). The connected party rules do not apply even if the person who transfers the asset is the only or main employee who will benefit from the pension fund — although HMRC caution that the transaction between the individual and pension fund trustees must be regarded as taking place at market value for capital gains purposes.
Contributions under attack
In these troubled times almost any company could be at risk of insolvency. Company owner/directors will be concerned for their businesses, but equally concerned that the money they have salted away in their SIPPs or SSASs is safe from the company’s creditors.
Normally, funds legally contributed by the employing company to a registered pension scheme cannot be clawed back to be used to satisfy the debts of that company, as the pension fund is a separate legal entity. However, the pension scheme may be forced to return the contribution to the company where all of the following conditions apply:
- the company was insolvent at the time the contribution was made, or making the contribution render the company insolvent; and
- the decision to make the contribution was influenced by a desire to advantage the employee/director as against the creditors of the company.
If these conditions apply, the act of making the contribution is referred to as a ‘voidable preference’ under the Insolvency Act 1986, s. 239-240. The company’s liquidator / administrator may challenge avoidable preference by making an application to the court within two years of the date of the transaction. If the court agrees that the transaction is a preference, it will order that it should be voided by the pension scheme returning the funds to the company.
If the company was not insolvent at the time the pension contribution was made, and making the contribution did not make the company insolvent, the contribution cannot be treated as a preference and the court cannot order the pension scheme to refund the money. If the directors incorrectly believed that the company was not insolvent at the time the contribution was made, when it was in fact insolvent, the transaction can still be a voidable preference.
There is one other circumstance where the contribution could be successfully challenged by the company’s creditors — if they can prove to the court that the contribution ‘was made for the purposes of putting the assets beyond the reach of a person who is making, or may at sometime make, a claim against the company’ (Insolvency Act 1986, s. 423). This circumstance requires the court to be satisfied the contribution was primarily a fraud on the company’s creditors. All the company has to show is that the contribution was not a means to defraud the creditors. It may be difficult to prove this either way, but the creditors are not bound by a time limit when making an application to the court to set aside the contribution on grounds of fraud.
Many SIPP providers do not accept in-specie contributions because they believe the transfer process is risky and complicated, but if you consult a specialist then the process can run quite smoothly.
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