Tax on investments for pension trustees
Find out about the tax rules on pension scheme investments and what the tax charges will be if certain conditions are not met.
Basic investment considerations
There are conditions on:
- loans made by pension schemes
- shares owned by pension schemes
- how much a pension scheme can borrow from someone else
- scheme transactions with scheme members, employers or connected parties
There are extra conditions if a pension scheme is an investment regulated pension scheme.
If these conditions are not met the scheme administrator will have to pay tax and in most cases either the member or a scheme employer will have to as well.
The Pensions Regulator also has limits on what pension schemes may invest in.
Investment considerations
HMRC does not publish a list of acceptable investments. In deciding how a scheme investment will be taxed you need to consider:
- what the scheme is investing in
- if the scheme is an investment regulated pension scheme and if it is, would the investment be classed as ‘taxable property’
Loans made by a pension scheme
The following loans from a pension scheme will be unauthorised payments. Loans to a:
- scheme member
- person or company connected to a member
- person or company connected to a scheme employer
A connected person is usually a relative, spouse or civil partner of the member. A company is connected to the member if they have control of it.
A loan from an occupational pension scheme to one of the scheme’s employers will be an unauthorised payment unless all the following conditions are met:
- the loan cannot be for more than five years
- interest charged on the loan must be at least 1% above the average base lending rate of the leading high street banks
- the loan must be secured as a first charge against assets of at least equal value to the loan plus the loan interest, there must be no other charge on any asset that takes priority over the pension scheme’s charge
- a charge is the legal right of the lender (the scheme) to be paid from the asset if the debt is not paid on time
- the loan cannot be more than 50% of the net value of the scheme assets
- the terms of the loan must require it to be repaid in equal annual instalments
Detailed technical guidance on who a connected person is can be found in the Capital Gains Manual.
Detailed technical guidance on loans can be found in the Pensions Tax Manual.
Shares
A pension scheme can buy quoted or unquoted shares in a company based either in the UK or overseas.
An occupational pension scheme can buy shares in one or more of the employers participating in the scheme as long as both the following conditions are met:
- the total value of the scheme funds invested is less then 20% of the net value of the pension scheme funds
- the amount invested by the scheme in the shares of any one employer participating in the scheme is less than 5% of net value of the pension scheme funds
Any investment larger than this will be an unauthorised payment and both the scheme employer and scheme administrator will have to pay a tax charge on the amount above the limit.
Detailed technical guidance on investing in shares can be found in the Pensions Tax Manual.
Borrowing by the pension scheme
A pension scheme can borrow money from an individual, company or financial institution.
If a scheme borrows an amount that is more than 50% of the value of the pension fund the scheme administrator will have to pay a 40% scheme sanction charge on the amount above the limit
Detailed technical guidance on borrowing by pension schemes can be found in the Pensions Tax Manual.
Scheme transactions with members, employers and connected parties
A pension scheme can enter into a transaction such as the purchase or sale of a scheme asset with a member, a scheme employer or someone connected with them. If the transaction is not on a commercial ‘arm’s length’ basis the scheme will have made an unauthorised payment.
Both the member or employer and the scheme administrator will have to pay tax on the difference between the market value of the investment and the amount paid or received.
A connected person is usually a relative, spouse or civil partner of the member. A company is connected to the member if they have control of it. A company is connected with another company if both are controlled by the same person.
Detailed technical guidance on who a connected person is can be found in the Capital Gains Manual.
Detailed technical guidance on transactions with members, employers and connected parties can be found in the Pensions Tax Manual.
Extra rules for investment regulated pension schemes
A scheme is an investment regulated pension scheme if at least one of the members (or someone connected to them) is able to influence how their own pension pot is invested.
An occupational pension scheme with less than 50 members is also an investment regulated pension scheme if at least one of the members (or someone connected to them) is able to influence what the pension scheme invests in.
An unauthorised payment will occur if the scheme invests either directly or indirectly in taxable property that is either:
- residential property - such as a building or structure used or suitable for use as a dwelling and associated land
- tangible moveable property - things you can touch and move for example cars and vans or office furniture
In this situation both the member and scheme administrator will have to pay tax on the amount paid for the asset, and any costs involved in making the investment. The scheme administrator will also have to pay tax on any income received from the asset and on any capital gain made on its disposal.
The amount of tax due on taxable property depends on whether it’s held directly or indirectly by the scheme. If your scheme has invested in taxable property and you want to know how it’s taxed follow the link below.
Detailed technical guidance on what an investment regulated pension scheme is can be found in the Pensions Tax Manual.
Detailed technical guidance on taxable property can be found in the Pensions Tax Manual.
Tax relief on investments
The income and gains from most pension scheme investments are not taxable.
Often income from pension scheme investments will be paid without having tax deducted. Where tax has been deducted from this income the scheme can claim the tax back from HMRC.