Schemes are thinking twice about undertaking bulk transfers of benefits to avoid the risk of passing on individual tax charges to members as they await final official rules.
Planned scheme mergers have been delayed due to a lack of clarity around the tax treatment of underfunded bulk transfers, introduced by changes to annual allowance tax rules in the Finance Act 2011, lawyers have said.
Largely, the easiest thing to do is wait because we know the government is intending to change that
Rosalind Connor
Under Article 7 of the draft Annual Allowance Charge (Amendment) Order, when there is a block transfer of members’ benefits from one scheme to another, the closing value of an individual's pension should be reduced by the annual amount that would have been payable in the original scheme.
However, implementation of the order has been delayed following concerns underfunded bulk transfers would lead to an individual tax charge.
“[Some] people don’t want to take the risk that their employees will be subject to a tax charge,” said Rosalind Connor, partner at Taylor Wessing.
Last July HM Revenue & Customs issued a statement outlining the government’s intention that charges should not arise:
when there is a bulk transfer of a group of members from one registered scheme to another due to an employer rearranging its scheme or as a result of a business transaction;
simply because the transfer is underfunded;
when the benefit transferred to the receiving scheme is the same in principle as if it had remained in the original scheme.
The policy aims remain unchanged, including the intention to give effect to these changes from 2011/12, said a spokesperson for HMRC.
“Together with input from industry, HMRC has continued to work on the detail with a view to publishing a revised draft as soon as possible,” said the spokesperson.
“Generally because of the statements HMRC has issued, people are feeling more relaxed,” said Faye Jarvis, senior associate at law firm Hogan Lovells.
However, trustees may seek some form of indemnity from the sponsoring employer to protect members from a tax charge, she added.
“I have certainly heard that some schemes have said, ‘we can’t go ahead’, and others have said they’re comfortable,” said Andrew Patten, partner at Dentons.
The willingness of trustees or employers to undertake mergers varies depending on their risk appetite, said Patten. He added it would be surprising for HMRC to pursue a tax charge.
However, some trustees may want to consider waiting until the final order clarifies the issue, said Connor.
“Largely, the easiest thing to do is wait because we know the government is intending to change that,” she said.
