Rowanmoor Pensions has confirmed it will still offer in-specie transfers on property into SIPPs and SSASs, provided a recent independent valuation has been obtained.
The firm's announcemnet is in response to a document from the Association of Member-Directed Pension Schemes (AMPS) outlining HM Revenue & Customs’ (HMRC) expectations on how in-specie contributions work, following a series of meetings designed to provide the industry with more clarification.
However, while the seven-page newsletter confirms HMRC requires in-specie contributions to be declared in a monetary form, it also points out in order to receive tax relief on the contribution a “legal and irrevocable debt” must be created.
And it warns a “standard single contribution application” might not apply, as the administrator has to be able to legally pursue any shortfall in the “debt” created and the contract formed for this kind of payment – for example when a client states a wish to contribute £10,000 into their scheme but then only pays £8,000 - does not allow this.
In addition, the newsletter reveals clients have to understand that once a debt is created they will have to make the full payment, even if the in-specie assets do not turn out to be acceptable or turn out to be valued significantly less than expected.
The document suggests this could have serious implications for property, as it says a debt could be created for £200,000 which is intended to be settled by the in-specie transfer of a commercial property of that value.
However, it warns if the property survey reveals there are problems such as contaminated land issues and the trustees/administrator do not accept the property, the debt of £200,000 must still be settled.
In addition, AMPS points out HMRC expects contributions and tax relief to apply from the date when the assets are received by the scheme – not when the transaction is accepted - which means if the value of the shares being transferred falls during this transition period, clients will be responsible for making up the shortfall in the debt.
However, Rowanmoor says it will continue to accept property as in-specie transfers because there is no issue with this asset class as the value does not change overnight, and even HMRC accepts valuations are valid for three months.
It says the removal of the connected party transaction rules since A-Day has resulted in increased interest in in-specie transfers - particularly from professional partnerships where the property is privately owned - as it can maximise capital gains tax planning by transferring the property in tranches on an annual basis.
As a result, Rowanmoor says provided an independent valuation is obtained each time to determine the monetary value of the property it will accept property transfers in tranches, although it admits the AMPS paper does reveal some issues with in specie share transfers.
David Seaton, director of Rowanmoor says regrettably the firm believes HMRC’s interpretation of the rules does make contributions of shares, transferred in-specie, “very difficult”.
As he points out if the share price falls between the time the member agrees to contribute the shares and when the transfer takes place, an effective debt has been created between the pension scheme and the member which must be settled in cash.
And if this settlement does not take place, he warns there is a potential tax charge of 40% on the value of the debt as it is classed as an unauthorised payment charge.
However, Seaton says provided the client understands there could be a potential debt resulting from an in-specie transfer of shares, and they are happy with this possibility, Rowanmoor will allow the transaction.
And he suggests one way to prove this, is to get people to sign a document confirming they will settle any outstanding debt resulting from the transaction, and that they understand the contribution only counts at the date of the transfer, not when the decision to contribute is made.
Seaton adds: “I think HMRC is going overboard with this, as one purpose of the Finance Act 2004 was to allow people to move share save schemes into pensions. So to create an interpretation so people can’t do it is barmy nonsense.”
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