A while back we wrote a blog that discussed how SSAS clients can he helped with tricky problems in order to set their pension scheme on the right footing and preserve the tax privileged funds for future generations.
We thought it might be helpful to show you how this works, although unlike the real Repair Shop, there are fewer moments of tearful joy at the end, at least as far as I know.
A SSAS pension predicament
“Pat” (not his real name) came to us with a pension scheme that had an unfortunate past. Mistakes had meant that the pension scheme had advanced an unsecured loan to Pat’s company, and the trustees had also purchased preference shares in another of Pat’s companies.
However, no coupon had been paid on the shares and the redemption date had passed. Unfortunately, on top of this, a previous adviser had arranged for Pat to become the Scheme Administrator, without his knowledge or consent. Given that he was unaware of this, Pat had not kept the reports and returns due to HM Revenue & Customs (HMRC) from the Scheme Administrator up to date.
Pat’s installation as Scheme Administrator came when the former adviser’s firm got into difficulties. At that point HMRC understandably raised questions about the schemes they had looked after. The loan was not done in the manner required in order to be tax-efficient. The preference shares could have been tax inefficient too, if not handled on an arm’s length basis.
The combined value of the loan and overdue preference shares was such that if both had represented unauthorised payments, the pension scheme could have crossed the threshold where HMRC could have de-registered it — with catastrophic tax consequences. It would have meant a 40% tax charge on the value of the scheme at the point of de-registration, with subsequent income and gains taxed as for a conventional trust, and benefit payments subject to tax on the recipient as income.
Communicating with HMRC
We provided consultancy to help Pat and his advisers communicate with HMRC, including provision of suitable documents to demonstrate the history of his being appointed as Scheme Administrator without his knowledge. In particular, we were able to help steer the parties to communicate in such a way that HMRC were able to recognise that the Trustees had not intended to reach the position they were in, but had got there from past misadventures.
However, there is a straightforward requirement for loans to employers to be secured, and so tax would have to be paid on this as an unauthorised payment. Pat agreed this with HMRC. There is normally additional tax on the Scheme Administrator, called the Scheme Sanction Charge. However, given the history of the Scheme Administrator appointment, following the correspondence with HMRC, they did not impose a Sanction Charge on the Scheme Administrator.
Since the preference shares were held in a “connected” company, the terms needed to be arm’s length. We helped Pat communicate on this point with HMRC and eventually, while late, the shares were redeemed in full with interest. This satisfied HMRC and, for the trustees, the interest is not subject to tax as the scheme remains a registered pension scheme.
We have also helped Pat as he brought the reporting and returns to HMRC up to date.
Protecting your wealth
Administratively, the pension scheme has made its peace with HMRC. And while there was tax to pay on the loan, de-registration did not happen. This means that income and gains in the scheme will continue to roll up with the usual tax privileges and, in time, the members will be able to draw their benefits subject to the usual rules, including the availability of 25% of their funds as tax-free Pension Commencement Lump Sums.
Furthermore, looking ahead, any residual funds can be passed on to future generations in a tax privileged environment, which would not have happened if the scheme had been de-registered.
Please bear in mind that the SSAS team do not provide regulated financial advice. So, while we can help with the repair work, we cannot provide guidance on what might be the most suitable investments or course of action regarding benefits for individuals.
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