Reattribution of inherited estates & payments to pension policyholders

A new, simpler regime providing generous tax reliefs for pension saving came into effect on 6 April 2006. A key principle underlying this regime is that tax relieved funds held in a pension scheme should be used to provide for an income in retirement. Therefore certain payments made out of tax subsidised pension savings which inappropriately reduce the amount of savings available to provide a pension in retirement are subject to tax charges designed to re-coup the tax reliefs related to them – the ‘unauthorised payments’ charges. There is also power under the new pensions tax regime to exclude by regulation specified types of payment from being subject to the unauthorised payments tax charge, which may, for example, be used where the specific type of payment does not actually result in any diminution in value of the fund available to provide for a pension in retirement.

HMRC has received representations on the tax treatment of certain payments made to those holding with-profits policies to facilitate the reattribution of ‘inherited estates’ – which is defined in the Conduct of Business sourcebook issued by the Financial Services Authority as an amount representing the fair market value of the with-profits assets less the realistic value of liabilities of a with-profits fund.

Where such payments are made to those holding the with-profits policies as part of a pension arrangement an unauthorised payments charge may arise. Where, however, such a payment does not diminish the value of the funds held within a pension scheme, and is made to protect policyholders’ interests, the Government does not believe that the payment should be subject to an unauthorised payments tax charge.

The Government is therefore intending to amend pensions tax legislation to relieve payments made in conjunction with a reattribution mechanism which involves the application of Part 7 of the Financial Services and Markets Act 2000 (transfers of insurance business) from the unauthorised payments tax charge.

HMRC is today publishing draft regulations (PDF 32K) for consultation. We would welcome representations including on whether the scope of this measure should be limited to formal reattributions that make use of this mechanism or whether it should be extended to cover alternative ways of carrying out such transactions which meet the principles set out above.

All representations should be sent by 31 August 2007, by email if possible, to: pensionsconsult@hmrc.gsi.gov.uk

Or by post to:

Pensions Consultation
Pensions Policy Team (Room G63)
HM Revenue and Customs
100 Parliament Street
London SW1 2BQ