Whether relief is available for a pension contribution made in the form of assets in satisfaction of a debt

Sat 24 Mar 2018

The First tier Tribunal has held that an agreement to make a contribution to a self-invested pension plan (SIPP) created a debt which could be satisfied by the transfer of an asset.  As a result the contribution qualified for relief from income tax.

Background

The particular SIPP conditions in this case included terms that provided that:

• The payment of contributions shall be subject to such provisions as are set out in the Rules and the Terms and Conditions and such other requirements that the Scheme Administrator may specify from time to time.”
•  The scheme member had the right and entitlement to “solely to exercise, in relation to his Member’s Fund, at his absolute discretion, the powers to instruct the Scheme Administrator to make an Eligible Investment.”
• that contributions “may be made only in such manner as the Scheme Administrator “may from time to time prescribe”.

One member submitted a contribution form documenting his commitment to make a contribution of £68,324 net. The scheme administrator wrote to the individual, acknowledging receipt of the Contribution Form notifying them of the individual’s intention “to make an ‘in specie’ contribution to the HFM Columbus SIPP” and advising him that “By signing the declaration [in the Contribution Form] you created a legally binding and irrevocable obligation to make the contribution and as such we now require written confirmation from you as to how you intend to settle the debt.”

The individual replied in writing confirming that his “contribution shall be made by way of an in-specie transfer of …..HFM Columbus Group Holdings Ordinary Shares: 760,846 units”(“the Shares”), acknowledging that if the value of the shares changed prior to the contribution, any shortfall in contribution will be made up by the payment of a monetary amount.  It was also acknowledged that the commitment to make the contribution was a debt in respect of which the individual could be pursued by the SIPP administrator.

HMRC’s view and the FTT decision

HMRC contended that the FA 2004 s.188 reference to ‘contributions paid’ in the context of tax relief for contributions, required a money payment. They also contended that the omission in s.188 of provision for the valuation of assets to satisfy contributions, and reference in other parts of the pension code to the ability to use assets to satisfy certain payment obligations, pointed to the fact that a contribution of assets would not satisfy the requirements of s188. They also pointed to explanatory notes and Hansard discussions on the meaning of contributions paid, which specifically indicated that a contribution of assets would not meet the conditions for income tax relief.

The FTT, however, considered there was nothing in s.188 to restrict the meaning of contributions paid to amounts paid in cash. It considered that in the circumstances of this case, a legal obligation to contribute a fixed monetary amount had been created, and that this debt could be settled by the transfer of assets.  The FTT did not consider the references to the use of assets in other parts of the pensions code, nor the specific reference in FA 2004 s.195 to the use of shares acquired through SAYE schemes for contributions, prevented the use of assets other than cash to settle a debt.

The FTT also rejected HMRC’s attempt to infer the will of Parliament through the application of text in explanatory notes and reference to Hansard. Explanatory notes could not be inferred as the will of Parliament and could only be used to review a situation where HMRC were seeking to apply a different interpretation to that set out in the explanatory notes.  The FTT did not consider there to be sufficient ambiguity in the legislation to refer to Hansard.  The appeal was therefore allowed in full.

Comment

This decision does not go so far as to say that a contribution of assets meets the requirement for income tax relief on pension contributions. However, assuming it is not appealed, the decision does confirm that if the contract documentation is drawn up in the right way, it is possible to effect a pension contribution by means of a transfer of assets other than cash.  For a further discussion of the tax consequences of pension contributions, please get in touch with a member of the Mazars private client team.