Home > News > 2004 > February 2004 > Funded Unapproved Retirement Benefit Schemes
Funded Unapproved Retirement Benefit Schemes
Adrian Waddingham reviews the significant changes being proposed by the Government to the tax treatment of FURBS.
An update to this article was issued in June 2004 entitled "FURBS and the 2006 Tax Simplification Proposals"
Background
Unapproved schemes, known by the acronym FURBS, prove very flexible, and became popular since they were introduced in the 1989 Finance Act. They provided a good way of topping up retirement benefits in a trust that was not constrained by Inland Revenue rules, and could be invested freely. Although there was not as much tax relief as given to approved retirement schemes, there was sufficient advantage to make them attractive compared to personal savings.
In April 1998 they became less attractive because from that date the Government applied National Insurance to employer contributions to a FURBS. In fact there is still some legal doubt as to whether National Insurance can be levied on these contributions, although the Revenue are still insisting that they have the authority so to do.
Employer contributions into a FURBS were normally taxed on the employee as a benefit-in-kind and the tax treatment thereafter was:
- the FURBS income was taxed at 20% or 22% according to source (and on dividends taxed at source there was no further tax to pay)
- capital gains were taxed at 34% less taper relief (this rate applied from 5 April 1998)
- the benefits could be taken as a tax-free lump sum around or after retirement
- on death before the benefits were drawn, the fund normally escaped inheritance tax.
The proposed changes
Readers of our recent newsletters will be aware that radical changes to the taxation of all pension schemes are proposed by the Government, expected to come into effect on 6 April 2005 (now confirmed as 6 April 2006). These plans were first announced in December 2002, but it was not until December 2003 that we were given details of their proposals for FURBS. Unfortunately their intentions for FURBS are not very encouraging:
- after April 2005 (now April 2006) contributions to FURBS will not be subject to income tax and national insurance, but nor will the employer get tax relief
- the taxation of income in the FURBS will be the same as for other discretionary trusts, in effect 40%
- the rate of capital gains tax increases to 40% from April 2004 (note that this change is being made in 2004, not 2005)
- benefits arising from contributions paid into a FURBS after 5 April 2005 (now 5 April 2006) will be taxable on the employee when received, and in the event of death will not benefit from inheritance tax protection.
Fortunately, there are transitional arrangements proposed to cover FURBS already in existence at 6 April 2005 (now 6 April 2006). In respect of assets held at that date, the inheritance tax protection is to continue and, provided the contributions up to that date were assessed to income tax on the employee when they were made, the benefits taken out will still be free of tax. However, even FURBS in existence at that date have to start paying tax on income and capital gains at 40%.
These changes mean that the position of all existing FURBS will have to be reviewed before 6 April 2005 (now 6 April 2006). We are still to see full details of the proposals, and indeed the proposals could change so we are not suggesting these decisions are urgent. Three questions immediately spring to mind, and our preliminary views are as follows:
Will any new FURBS be established after 5 April 2005 (now April 2006)?
Probably not. It would seem that new FURBS would not be significantly better than making additional savings in an approved scheme (to be called regulated schemes in future), provided that saving is within the proposed annual allowance of £200,000.
Will those with existing FURBS make new contributions after 5 April 2005 (now 5 April 2006)?
Probably not. They would not be deductible for the company and they will not benefit from inheritance tax protection.
Will existing FURBS at 5 April 2005 (now 5 April 2006) wind-up?
Probably not. The higher tax on income and gains is disappointing but the trustees of FURBS may rearrange their investments, for example avoiding income-producing investments. We think that the continuing inheritance tax advantage is likely to mean that most existing FURBS would choose to stay in being.
Conclusion
It is likely that some FURBS will close in the next fourteen months, and in particular these will be FURBS that are:
- relatively small
- those where the member is not concerned about the inheritance tax protection
- those who have so far avoided income tax on their contributions. For them benefits taken after 6 April 2006 are likely to be taxable.
Hopefully these brief comments on the current position are helpful, but please bear in mind that we are still working on the basis of proposals from the Government and indeed the consultation period on their plans remains open until 5 March.
We are making representations about these unfortunate changes but do not think we have much chance of persuading the Government to change their mind. These proposals on unapproved schemes are part of a package affecting all pension schemes and the great majority of the proposals in the package are proving very popular.
Please speak to your usual Barnett Waddingham contact to discuss any of the above.
Adrian Waddingham, February 2004.