Inland Revenue 35
17 March 1998
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PENSION SCHEMES: CLAMPING DOWN ON TAX AVOIDANCE
The Chancellor proposes to clampdown on abuses of the pensions
tax reliefs by some pension schemes. These abuses involve
arrangements which set out to avoid the tax charge which
should apply when certain small occupational pension schemes
cease to be tax approved. Following loss of tax approval the
schemes transfer their assets to an offshore trust, taking
them outside the normal pensions rules. Abuses of this kind
undermine the purpose for which tax reliefs are given.
The package of measures, which take effect from today,
includes improvement of the arrangements for monitoring the
tax affairs of personal pension schemes. This will make the
arrangements fairer and bring them more into line with those
for occupational pension schemes.
DETAILS
1. The package of measures, will be implemented through the
Finance Bill, secondary legislation and amendments to
existing practice for approving pension schemes for tax
purposes. It includes provisions which:
- Extend the special 40 per cent income tax charge on the
value of assets held by certain occupational pension
schemes. With effect from today, this charge will
additionally apply where a scheme ceases to be approved
and has received a transfer value from another approved
pension arrangement set up for a controlling director of
a company (or a person whose earnings were chargeable to
tax under Schedule D);
- Introduce a new 40 per cent tax charge where particular
arrangements made under an approved personal
pension scheme lose their tax approval. The tax will
be charged on the value of assets attributable to
arrangements which cease to be approved on or after
today. The tax charge will be on the scheme
administrator in the first instance but, where there is
no scheme administrator or the administrator cannot be
traced or does not meet his obligations, the individual
who made the personal pension arrangements will become
responsible for payment.
- These measures broadly mirror provisions already in place
for the tax treatment of approved occupational pension
schemes, including small self-administered schemes.
- Enhance the existing arrangements which protect the
Exchequer where a pension scheme administrator fails to
pay the special 40 per cent tax charge due when an
occupational pension scheme ceases to be approved. At
present, the employer becomes liable to pay the tax, but
there have been examples of arrangements involving
"shell" employer companies which have no funds to meet
the tax liability. For schemes that cease to be approved
on or after today, the ultimate responsibility for
paying the tax due will fall on those scheme members who
were controlling directors of the employer company (or
whose earnings were chargeable to tax under Schedule D).
- Override the trust deeds and rules of existing tax
approved small self- administered schemes so that, from
today, the scheme's independent trustee approved by the
Inland Revenue (known as a pensioneer trustee) cannot be
removed without immediately being replaced by another
pensioneer trustee.
- Alter the Inland Revenue's discretionary approval
practice so that pensioneer trustees of small
self-administered schemes must, in accordance with the
normal requirements of trust law, be co-signatories to
bank accounts and registered owners (along with the
other trustees) of scheme assets.
- Introduce powers to make regulations specifying:
(a) the records which a personal pension
schemeadministrator must keep and, if necessary, make
available for inspection; and
(b) restrictions on transactions and investments by
self- invested personal pension schemes, that is,
personal pension schemes in which decisions on investment
management are delegated by the scheme administrator to
scheme members.
These new powers will improve the effectiveness of the
Inland Revenue's compliance work on personal pension
schemes by bringing their tax rules more into line with
those applying to occupational pension schemes.
2. In addition, regulations have been laid today which amend
the rules for small self-administered schemes to make it a
condition for tax approval of new schemes that a pensioneer
trustee cannot be removed without immediately being replaced
by another pensioneer trustee. The amending regulations also
make other detailed changes to the permitted investments and
borrowing and lending arrangements of small self-administered
schemes.
3. The overall aim of the package is to strengthen the
present controls over tax approved occupational and personal
pension schemes in order to discourage scheme members from
attempting to strip the schemes of assets. This activity is
contrary to the purpose for which approved pension
arrangements qualify for tax relief.
NOTES FOR EDITORS
1. The Inland Revenue approve occupational and personal
pensions under legislation contained in the Income and
Corporation Taxes Act 1988. The requirements for tax
approval are administered by the Pension Schemes Office
(PSO), an Executive Office of the Inland Revenue. The purpose
of approval is to make sure that the tax reliefs are used
only to provide genuine retirement and death benefits. Once
a pension scheme has been approved its activities are
monitored by the PSO to make sure that it continues to meet
the conditions for tax approval.
2. Approved occupational and personal pension schemes enjoy
very favourable tax treatment. Contributions to the scheme
qualify for tax relief; the investment build-up within the
scheme is tax exempt; and part of the benefits can be paid as
a tax-free lump sum.
3. Personal pension schemes were introduced in 1988 for
people who do not participate in an occupational pension
scheme They are provided by a wide range of financial
institutions, such as life assurance companies, banks,
building societies, unit trusts and other similar bodies.
Since 1989 members have been permitted to decide how their
contributions are to be invested. This has led to the
establishment of a number of so-called self- invested personal
pension schemes.
4. Two sets of regulations have been made today. Their
titles are The Retirement Benefits Schemes (Restriction on
Discretion to Approve) (Small Self-Administered Schemes)
(Amendment) Regulations 1998 and The Retirement Benefits
Schemes (Restriction on Discretion to Approve) (Excepted
Provisions) Regulations 1998. Copies will be available from
the Stationery Office shortly.
INLAND REVENUE PRESS OFFICE
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