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Pension tax relief is not claimable on in-specie contributions in UK SIPP

HM Revenue & Customs has claimed victory in a major industry case, after the Upper Tribunal ruled pension tax relief is not claimable on in-specie contributions and paved the way for the taxman to reclaim millions.

The ruling is of particular importance as it sets a precedent for the pensions industry. Many pensions administrators had followed the guidance in the Pensions Tax Manual, which set out a detailed procedure for allowing assets transferred in specie to be treated as a contribution for tax relief purposes in a UK SIPP.

In-specie contributions are where assets such as property or shares are transferred into a Sipp without first being converted into cash.

The case previously saw a SIPP administrator, win at the First Tier Tribunal in 2018 after HMRC refused to accept a claim from one of its clients for tax relief from income tax at source. That was in respect of a contribution worth £68,342 in the period March 6 to April 5, 2016.

The judge at the time ruled the meaning of “contribution paid” was “wide enough to cover a transfer of assets in satisfaction of a debt as occurred in this case”.

But in the Upper Tribunal, HMRC successfully argued that “contributions paid” refers only to payments of money and does not extend to transfers of assets and therefore in-specie contributions do not qualify for tax relief.

However, the Upper Tribunal agreed with the SIPP administrator that HMRC’s pension tax guidance is not consistent with law and could be interpreted incorrectly, such as in the case of then SIPP administrator and its client.

It was noted that in HMRC’s pensions tax manual it stated: “It may be possible to structure a transaction so that a monetary contribution is achieved without the need for cash to pass between the employer and the pension scheme.”

But in the end it was concluded that this is only guidance and the SIPP administrator should have interpreted the relevant legislation.

The Judge said: “Statements in HMRC’s manuals are merely HMRC’s interpretation of the law in their internal guidance and they do not have the force of law.

“We must interpret the legislation in accordance with the principles of construction described above and if we conclude, as we have, that the legislation bears a different meaning to that found in the HMRC manual, the legislation must be preferred.”

In theory, a scheme administrator can claim basic rate tax relief on in specie contributions from HMRC while the member can claim any tax relief above the basic rate, in the same way as with cash contributions.

But HMRC appeared to change its stance on allowing tax relief in 2016, leading to providers suspending such contributions and gearing up for a fight through legal channels.

HMRC may be able to claim millions of pounds from clients across the Sipp industry as a result.

A spokesperson for the SIPP administrator said it would “pursue the implications of the defective guidance with HMRC” and look into appealing the Upper Tribunal’s decision.

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