PTM133700 - Unauthorised payments: deemed or specific situations that are unauthorised payments: value shifting
Glossary PTM000001
General
Securities
Lease transactions
Removal of rights or restrictions
Transactions where no unauthorised payments charge arises
General
Sections 174 and 181 Finance Act 2004
There are many types of transaction which may be entered into by a registered pension scheme which have the effect of shifting value from the scheme to:
- a person who is, or has been, a scheme member or a connected person (see PTM027000) or
- to a person who is, or has been, a sponsoring employer.
Value may be shifted by either increasing the value of an asset or decreasing a liability of a scheme member or sponsoring employer without actually creating a payment.
Where value is passed from the scheme to either a scheme member (or a person who has been a scheme member) or a sponsoring employer (or a person who has been a sponsoring employer), and the amount passed is other than what can be expected on arm’s length terms, then:
- the amount of the value shifted out of the scheme is treated as an unauthorised payment and
- a scheme sanction charge will also be made on the scheme administrator.
Where a scheme enters into a transaction that increases the value of an asset or decreases the amount of a liability of a person connected with a:
- member
- former member
- sponsoring employer
- former sponsoring employer
- person who was connected with a member or former member on the date of the member’s or former member’s death
the increase in the value of the asset or decrease in liability will be treated as being for the benefit of the member, former member, sponsoring employer, or former sponsoring employer (as the case may be).
PTM027000 sets out what is meant by a connected person.
For a definition of ‘sponsoring employer’ see PTM022000
Securities
It is possible to pass value from the scheme without making any payments as such. Probably the simplest example of this is by making changes to the rights attached to shares.
Example
Andrew is a member of ABC Ltd Retirement Benefits Scheme (‘ABC Ltd RBS’).
ABC Ltd RBS owns 100% of the class A shares in ABC Ltd.
Andrew owns 100% of the class B shares in ABC Ltd.
Both the class A shares and the class B shares have similar rights, but the rights attached to the class A shares are subsequently changed so they no longer include the rights to dividends.
The result is that the value from the class A shares has passed to the B shares and therefore to the member (Andrew) without any payment.
Andrew will be liable to an unauthorised payments charge equivalent to the decrease in value of the shares held by the scheme. The scheme administrator will also be liable to a scheme sanction charge.
Find more details about sponsoring employer investments at PTM122000
Lease transactions
It is also possible to pass value from a registered pension scheme through lease transactions.
Example
XYZ Ltd Retirement Benefit Scheme owns a property.
The scheme sells the freehold of the property to XYZ Ltd (the sponsoring employer) for a minimal amount subject to a leaseback to the scheme for 100 years and the scheme paying a ground rent of £1 per year.
XYZ Ltd subsequently increases the rent to £10,000 per year.
Altering the rights to the lease in this way has passed the value of the property from the scheme to XYZ Ltd.
XYZ Ltd will be liable to an unauthorised payments charge on the amount of the decrease in value of the property held by the scheme. The scheme administrator will also be liable to a scheme sanction charge.
Removal of rights or restrictions
It is possible to pass value out of a registered pension scheme where the value of an asset held by a scheme is diminished or the liability of the scheme is increased because a right or restriction over the asset or liability is removed.
Example
JKL Ltd Pension Scheme owns a property which is leased to the member, Barry, subject to a restrictive covenant over its use for a hazardous purpose.
The scheme removes the restrictive covenant, which in turn reduces the value of the asset and Barry’s liability under the lease.
Barry will be liable to an unauthorised payments charge on the amount of the decrease in value of the property held by the scheme. The scheme administrator of JKL Ltd Pension Scheme will also be liable to a scheme sanction charge.
Transactions where no unauthorised payments charge arises
Where a transaction takes place that transfers value from the registered pension scheme but the amount does not differ from that expected in an arm’s length transaction, no unauthorised payments charge will arise.
Example
KK Ltd Registered Pension Scheme leases a property from the sponsoring employer KK Ltd. The lease is subject to a normal commercial rental review. This review may reduce the value of the lease but any such drop in value would not give rise to an unauthorised payments charge if it is on commercial arm’s length terms.