PTM113240 - International: UK tax charges on non UK schemes: the member payment charges and taxable property charges: attributing payments to particular funds under a relevant non-UK scheme before 6 April 2017

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Regulation 4 The Pension Schemes (Application of UK Provisions to Relevant Non-UK Schemes) Regulations 2006 - SI 2006/207

Regulation 4 of The Pension Schemes (Application of UK Provisions to Relevant Non-UK Schemes) Regulations 2006 provides how to determine whether or not payments made (or treated as made) by a relevant non-UK scheme (RNUKS) are to be treated as referable to a member’s

• UK tax-relieved fund,
• relevant transfer fund,
• taxable asset transfer fund
• ring-fenced transfer fund, or
• ring-fenced taxable asset transfer fund.

This page of guidance relates only to pensions crystallised and other payments made before 6 April 2017. For guidance on the treatment of pensions crystallised and other payments made on or after 6 April 2017 see PTM113249 to PTM113270

Attributing payments to a UK tax-relieved fund under a relevant non-UK scheme
Attributing payments to a relevant transfer fund and taxable asset transfer fund
Attributing payments to a ring-fenced transfer fund and ring-fenced taxable asset transfer fund
Examples of attributing payments to particular funds under a relevant non-UK scheme

Attributing payments to a UK tax-relieved fund under a relevant non-UK scheme

For these purposes it must be assumed that:

• payments made by the scheme to, or in respect of, the member are made out of the member’s UK tax-relieved fund in priority to any other fund under that scheme; and
• the amount of the member’s UK tax-relieved fund is reduced by the amount paid out of the scheme.

If the member’s UK tax-relieved fund is nil, or has been reduced to nil, it will be assumed that payments are made out of the member’s relevant transfer fund and taxable asset transfer fund before any other fund under the scheme - see Attributing payments to a relevant transfer fund and taxable asset transfer fund below.

This enables an individual to discharge their UK tax obligations at the earliest date possible.

An individual receiving transitional corresponding relief (see PTM111500) after 5 April 2006 who is able to make an in-service withdrawal from their corresponding scheme will need to take into account that these attribution rules will apply. So such a payment could give rise to a member payment charge. The attribution of payments will no longer be left to scheme managers and members where they have signed undertakings that no in-service withdrawal will be made from contributions made in respect of UK service. Those corresponding scheme undertakings will not be regarded as having been breached where an in-service withdrawal is deemed to have come from the member’s UK tax-relieved fund under the above attribution rules.

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Attributing payments to a relevant transfer fund and taxable asset transfer fund

Regulation 4 The Pensions Schemes (Application of UK Provisions to Relevant Non-UK Schemes) Regulations 2006 - SI 2006/207

If the member’s UK tax-relieved fund has been reduced to nil (or the member never had such a fund under the scheme) payments are attributed to member’s relevant transfer fund and taxable asset transfer fund before any other fund under the scheme. Payments are attributed in accordance with the following four rules, with an earlier rule applying in priority to a later rule.

Rule 1

Rule 1 applies where an unauthorised payment is treated as made by an RNUKS that is an investment-regulated pension scheme to a transfer member (see PTM113210) by virtue of section 174A Finance Act 2004 (see PTM113220). That occurs on the acquisition or improvement of taxable property or on the conversion or adaptation of property to become a residential property (PTM125300 and PTM125400). The rule is that:

• the payment will be treated as made out of the member’s relevant transfer fund and taxable asset transfer fund, but
• the interest in taxable property, in respect of which the unauthorised payment is treated as made, will represent the payment and - as an “appropriated asset” - will form part of the member’s relevant fund and taxable asset transfer fund up to an amount equal to the amount of that payment.

Under this rule the unauthorised deemed payment is treated as being made from the member’s relevant transfer fund and taxable asset transfer fund. There will be a taxable property unauthorised payments charge on the deemed payment up to the amount of the member’s taxable asset transfer fund. But the amount of the payment which is chargeable (the appropriated asset) will go into those funds. So, in effect, the member’s relevant transfer fund and taxable asset transfer fund will not be reduced by that payment.

Rule 2

Rule 2 applies if the scheme transfers that appropriated asset (or an interest in a vehicle through which the scheme holds the interest in the taxable property indirectly), or part of it, to another pension scheme. That transfer will be treated as a transfer of the whole, or part, of the member’s relevant transfer fund and taxable asset transfer fund - limited to the amount of the unauthorised payment - to that other scheme. If appropriate, it will fall within the member’s taxable asset transfer fund under the receiving scheme.

Rule 3

Rule 3 applies if the scheme disposes of the appropriated asset (or an interest in a vehicle through which the scheme holds the interest in the taxable property indirectly), or part of it, otherwise than by transferring it to another pension scheme. Any other property which directly or indirectly represents proceeds of either of those interests - limited to the amount of the unauthorised payment - will form part of the member’s relevant transfer fund and taxable asset transfer fund under the transferring scheme.

Rule 4

Rule 4 applies to payments made by the scheme to, or in respect of, the member other than:

• a transfer covered by rule 2 or rule 3, or
• an unauthorised deemed payment covered by rule 1.

So far as the member’s relevant transfer fund and taxable asset transfer fund are not represented by appropriated assets:

• where the member has both a relevant transfer fund and a taxable asset transfer fund, and the amount of the former exceeds the amount of the latter, such payments will - to the extent of that excess - be treated as made out of, and as reducing, their relevant transfer fund (but not their taxable asset transfer fund),and subject thereto, and
• such payments are made out of the member’s relevant transfer fund and taxable asset transfer fund in priority to any other fund under that scheme, and reduce (but not below nil) the amount of the relevant transfer fund and taxable asset transfer fund.

If there are any appropriated assets in the member’s relevant transfer fund and taxable asset transfer fund then they will be unaffected by this rule and will be treated as remaining therein.

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Attributing payments to a ring-fenced transfer fund and ring-fenced taxable asset transfer fund

Where a payment is made on or after 9 March 2017 but before 6 April 2017 it may be attributed to a member’s ring-fenced transfer fund and ring-fenced taxable asset transfer fund (if the member has one).

A payment may be attributed to a member’s ring-fenced transfer fund and ring-fenced taxable asset transfer fund if the member has neither a UK tax-relieved find nor a relevant transfer fund. This could be because those funds have been reduced to nil by earlier payments or because the member never had such a fund under the scheme.

If a member has more than one ring-fenced transfer fund under the scheme, payments are attributed first to the ring-fenced transfer fund with the earliest key date running thorough in date order to the fund with the latest key date.

Payments are attributed in accordance with the same four Rules that apply for attribution and reduction of a relevant transfer fund, with an earlier rule taking priority over a later rule. See ‘Attributing payments to a relevant transfer fund and taxable asset transfer fund’ but for ‘relevant transfer fund’ read ‘ring-fenced transfer fund’ and for ‘taxable asset transfer fund’ read ‘ring-fenced taxable asset transfer fund’.

Examples of attributing payments to particular funds under a relevant non-UK scheme

Example A

Tom receives a payment of £250,000 from an RNUKS when he is 45 years old. It is an unauthorised payment. His total fund within that scheme is £500,000.

If Tom has a UK tax-relieved fund of £200,000 and does not have a relevant transfer fund or a taxable asset transfer fund he will be liable to a member payment charge on £200,000 - the total of the UK tax-relieved fund as that is smaller than the payment.

If Tom has a UK tax-relieved fund of £200,000 and has a relevant transfer fund of £200,000, which includes within it a taxable asset transfer fund of £100,000 he will be liable to a member payment charge on £250,000. His UK tax-relieved fund will be reduced to nil and he will be left with a relevant transfer fund of £150,000, and a taxable asset transfer fund of £100,000.

Example B

On 25 May 2007 Rob transfers £500,000 from his RNUKS (scheme B), which is a qualifying recognised overseas pension scheme (QROPS), to an overseas scheme (scheme C) that is not a QROPS. The transfer does not include an appropriated asset.

At that time the total value of his funds in scheme B is £1.2 million. He has a UK tax-relieved fund in it of £300,000. He also has a relevant transfer fund in it of £600,000 - all of which is a taxable asset transfer fund - as a consequence of a recognised transfer of that amount from a registered pension scheme (scheme A).

Rob is liable to an unauthorised payments charge of 40 per cent and an unauthorised payments surcharge of 15 per cent on the £500,000 transferred to scheme C. That is because the transfer if made from a registered pension scheme would not be a recognised transfer. The unauthorised payments surcharge applies because the whole of the transferred amount of £500,000 is treated as coming from his UK tax-relieved fund, his relevant transfer fund, and his taxable asset transfer fund and because that amount exceeds 25 per cent of the value of his rights under scheme B.

Rob’s UK tax-relieved fund in scheme B is reduced from £300,000 to nil and his relevant transfer fund is reduced from £600,000 to £400,000, as is his taxable asset transfer fund.

On 13 November 2009 Rob transfers £600,000 from scheme B to scheme C. The transfer does not include an appropriated asset. The total value of Rob’s funds in scheme B at that time is £850,000. He has a UK tax-relieved fund in it of £50,000 because his employer has made UK tax-relieved contributions of that amount to it since the previous transfer was made. Rob’s relevant transfer fund (and taxable asset transfer fund) in it is still £400,000.

Rob is liable to an unauthorised payments charge and an unauthorised payments surcharge on the transfer to scheme C as the transfer, if made from a registered pension scheme, would not be a recognised transfer. The taxable amount is limited to £450,000, being the total amount of Rob’s UK tax-relieved fund and relevant transfer fund (and taxable asset transfer fund) in scheme B. Both Rob’s UK tax-relieved fund and relevant transfer fund (and taxable asset transfer fund) in scheme B are reduced to nil.

£150,000 of the amount transferred to scheme C will not be subject to tax as this amount is not referable to either Rob’s UK tax-relieved fund or relevant transfer fund (and taxable asset transfer fund).

Example C

On 15 May 2011 Anneli transfers £200,000 from an RNUKS (scheme B) to another RNUKS (scheme C) which is a QROPS and also an investment-regulated pension scheme. Included in the amount transferred is a UK tax-relieved fund of £50,000 and a relevant transfer fund of £100,000. Anneli’s relevant transfer fund under scheme B is wholly made up of an amount transferred from a registered pension scheme (scheme A) so her taxable asset transfer fund under scheme B amounted to £100,000.

Anneli’s relevant transfer fund under scheme C is therefore £150,000, of which £100,000 is represented by her taxable asset transfer fund. Anneli doesn’t have a UK tax-relieved fund under scheme C.

On 28 May 2011 scheme C buys a taxable property for £200,000 which is held under Anneli’s arrangement. That is an unauthorised deemed payment and is treated as made partly out of her relevant transfer fund and her taxable asset transfer fund. It gives rise to a member payment charge (and surcharge) on £100,000 - the part of the purchase price referable to her taxable asset transfer fund. That £100,000 interest in the appropriated asset is treated as going into Anneli’s relevant transfer fund and her taxable asset transfer fund.

On 9 December 2012 scheme C sells the taxable property for £250,000. £100,000 of those proceeds are treated as forming part of Anneli’s relevant transfer fund and taxable asset transfer fund under scheme C. So her relevant transfer fund remains at £150,000 and her taxable asset transfer fund remains at £100,000.

On 1 October 2013 Anneli receives a lump sum payment of £50,000 from scheme C. That is treated as made out of her relevant transfer fund but not her taxable asset transfer fund. It gives rise to an unauthorised payments charge. Her relevant transfer fund is reduced to £100,000 and now consists wholly of her taxable asset transfer fund.

On 29 July 2015 scheme C uses the remaining £250,000 in Anneli’s arrangement to provide her with a pension. The first £100,000 is treated as made out of her relevant transfer fund and taxable asset transfer fund, but no unauthorised payments charge arises as it is not an unauthorised payment.