RPSM07103040 - Technical Pages: Investments: Loans: Debts

Debts

A debt may be created which has not arisen through the lending of money. For example, a registered pension scheme may sell an asset to a scheme member or a person who is connected with a scheme member, but that member may not pay for the asset straight away. There has been no lending of money by the scheme but a debt has been created between the scheme and the member.

Where such debts are repaid on arms length terms they will not be treated as a loan. There must be no preferential treatment given to the sponsoring employer, member, or connected person when enforcing the collection of the debt.

For example if the sponsoring employer is in financial trouble and having problems repaying its creditors any debt to the pension scheme must be repaid on the same terms as similar debts to other creditors.

Where a debt is created which is not repaid on arms length terms, it will be treated as a loan in accordance with section 162 (4) and (5) Finance Act 2004.

Where a debt is created between a registered pension scheme and a scheme member, which is not repaid on arms length terms, the amount of the debt will be taxed as an unauthorised payment.

Where a debt is created between a registered pension scheme and the sponsoring employer, no charge will arise providing that the loan conformed to the rules on loans to employers (see RPSM07103050 onwards).

For these purposes, “connected party” is defined in the Income and Corporation Taxes Act 1988 (ICTA) - see RPSM07103180.