What the in specie is going on?

As you may have heard, in specie contributions to pensions are under scrutiny from HMRC. Tax relief on current claims is being refused and there is potential for a huge amount of tax relief already claimed to be paid back. Most providers won’t have huge volumes of these transactions, but if your client is in the process of making an in specie contribution, or has made one in the past, any loss of tax relief could have a big impact on their retirement savings.

The advantages of making an in specie contribution in certain circumstances are clear. Take the example of Mr A, a business owner who personally owns an industrial unit his company uses. This has been independently valued at £110,000 with no mortgage attached. Mr A’s adviser has suggested putting the property into his pension so the rental income will provide an investment return for his fund whilst it is a tax deductible expense for the business.

Mr A has £130,000 of carry forward available, plus £10,000 annual allowance this year as he is a high earner. If Mr A can put the property into a SIPP or SSAS as an in specie contribution, this will be a net contribution of £110,000 (£137,500 gross).

So, what’s the issue?

HMRC has two primary concerns, the first is regarding the valuations used for in specie contributions, and the second is around the processes used by providers.

The valuation issue applies equally to any connected party transaction, be it an in specie contribution, an asset sale or purchase. In respect of property as long as you’ve got a full ‘red book’ valuation from a RICS surveyor you should be on reasonably safe ground. When it comes to more esoteric investments such as unlisted shares, intellectual property and the like, things get a lot trickier and any valuation becomes harder to support. It is for this reason only SIPP and SSAS operators at the more bespoke end of the market are likely to have allowed such investments, and it’s long been known that such valuations could be brought into question.

It is HMRC’s examination of the processes used that is the more contentious point.

The Pensions Tax Manual (PTM) is clear that contributions must be a monetary amount, but it is possible for a member to agree to pay a monetary contribution and then transfer an asset instead. PTM goes on to say there must be a clear obligation to pay a specified amount, creating a recoverable debt obligation. There must then be a separate agreement between the trustees and the member to pass an asset to the scheme to meet this obligation (or offset against the obligation and pay the balance in cash).

The interpretation of this guidance is the big issue, and HMRC is questioning whether some firms’ processes effectively create the debt and then offset it with the asset. They are also questioning transactions on the basis that the contribution of the asset was “pre-ordained” and there was never any intention to contribute cash.

Why now?

This tax year claims for relief at source made by providers have to state if they include an in specie contribution. When in specie contributions are highlighted in a claim HMRC has been asking for information and withholding tax relief in many cases. HMRC has also been asking providers for details of other in specie contributions dating back to April 2009, the time when the guidance now in PTM was first issued.

What’s in it for HMRC?

Obviously if contributions have been made and tax relief is not granted then it saves HMRC money. Similarly if HMRC could successfully claw back previously granted tax relief it adds more to the coffers.

However, if you look forward, there’s not a lot to gain. If Mr A doesn’t have the cash available to make the contribution he has two options:

  1. Don’t make the contribution.
  2. Take out a bridging loan to fund a cash contribution, purchase the property from himself and then repay the loan.

At a time when the Government is trying to encourage savings, option 1 shouldn’t be the end result. Option 2 ends up in exactly the same position as an in specie contribution, except it has cost Mr A a bit more money in fees and interest, and the lender has made a bit of cash from the loan.

What happens next?

While HMRC’s challenge on in specie contributions continues, the vast majority of SIPP and SSAS providers have put a stop on accepting any such transactions until the position is clarified.

The industry body, AMPS, is working with member firms to resolve this with HMRC. It may be the outcome is further guidance, the last thing all parties will want is the legal expense of a test case to provide a definitive answer. Wouldn’t it be nice if the opportunity was taken to make things simpler still?

Why can’t in specie contributions be allowed? What is wrong with what Mr A is trying to do, and why do we have complex hoops to jump through?

Correspondence between HMRC and a national tax body confirmed that the same process did not need to be followed in relation to the in specie payment of lump sums and pensions. If HMRC is happy the rules allow in specie payment of benefits, and let’s remember HMRC receives tax from those, then it is only logical that there should be an equivalent position when contributions are being paid in.

Senior Technical Consultant

Lisa is an Economics graduate who has been in the financial services industry since 2003. Prior to joining AJ Bell in 2014 she spent nine years working in senior technical and consultancy roles at a major SIPP and SSAS provider. Lisa is part of our Technical Team, responsible for providing regulatory and technical analysis to the business and outside world. She is also a regular speaker at adviser events.