borrowing and lending by pension schemes (59)
Roderick Ramage BSc(Econ), solicitor
published by distribution to professional contacts on 26 October 2018
This article is not advice to any
person and may not be taken as a definitive statement of the law in general or
in any particular case. The author does not accept any responsibility for
anything that any person does or does not do as a result of reading it.
Whether or not trustees may borrow and lend money and provide
security for borrowings depends on the general trust law, the trust documents
and statute law. In this note, lending
by pension schemes is lending to scheme employers and connected or associated persons.
trust deeds and rules commonly permit trustees to borrow money, give security
for it and to lend money. These powers
are not unconditional, but must be exercised properly, which means, in general,
that the trustees believe that the borrowing or lending is the best interests
of the beneficiaries of the trust, namely the scheme’s members and their
The words “unauthorised” and “authorised” in the Finance Act 2004
are used to show whether payments are or are not liable to tax (other than
routine tax such as income tax on pensions).
These words do not prohibit or permit the payment or transaction or
invalidate it, but “merely” show whether they are taxable.
borrowing by pension
Regulation 5 of the Occupational
Pension Schemes (Investment) Regulations 2005, SI 2005/3378, made under the
Pensions Act 1995, s36A, prohibits pension schemes from borrowing money except
to provide liquidity on a temporary basis.
Schemes with fewer than 100 members are exempt from this prohibition: ib
Section 182 of the FA 2004 permits a registered money purchase
scheme to borrow if it meets the arrangement borrowing condition, which is that
the total of all existing borrowings (except amounts repaid) plus the new
borrowing is not more than half the value of the arrangement’s assets.
The consequence of an unauthorised borrowing is that, by the FA
2004, s183, the scheme is treated as having made a scheme chargeable
payment. The amount of the scheme chargeable
payment is either:
the amount of the new borrowing, if the existing borrowing is equal
to or more than half the value of the arrangement’s assets; or
if the existing borrowing is less than half the value of the arrangement’s
assets, the amount by which the sum of the existing and new borrowing exceeds
half the value of the arrangement’s assets.
There are corresponding provisions in s184 and s185 for
arrangements which are not money purchase.
When a pension scheme is treated as having made a scheme chargeable
payment, a scheme sanction charge become payable under s239 of the FA 2004 of
an amount, which, under s240, is 40% of the scheme chargeable amount.
Section 251 of the FA 2004 (Information: general requirements) and
reg 3 of the Registered Pension Schemes (Provision of Information) Regulations
2006. SI 2006/567 require information to be given to HMRC. Page 160000 of the Pension Taxed Manual
requires scheme administrators to tell HMRC of reportable events submitting an
event report for the tax year. A scheme
chargeable payment is a reportable event.
lending by pension
Section 40 of the PA 1995 regulation 12 of the Occupational Pension
Schemes (Investment) Regulations 2005, SI 2005/3378 prohibit the trustees of an
occupational pension scheme from holding more that 5% of the scheme’s assets in
employer-related investments, which include loans to the employer or persons
connected with or associates of the employer (as defined in the PA 1995 s123). The penalties on contravention can be to
a fine or imprisonment.
This prohibition does not apply to a small scheme (SI 2005/3378 reg
12(1)), which is an occupational scheme with fewer than twelve members, where all
the members are trustees (or trustees of a corporate trustee) of the scheme and
either (i) the scheme’s deed and rules require all decisions to be unanimous or
(ii) the scheme has an independent trustee as defined in the PA 1995 s23.
12 Payments by a pension scheme,
which are not authorised by the FA 2004, are taxed. By s179 a loan made to sponsoring employer is an authorised employer loan
(a) it does not
exceed 50% of the sum and assets held for the purpose of the scheme immediately
before the loan is made,
(b) it is secured
by a charge of adequate value,
(c) the rate of
interest payable on the loan is not less than the rate prescribed in SI
2005/3449, ie 1% pa plus the average base lending rates of specified banks,
(d) its repayment
date is within five years of the loan unless postponed for not more than five
years, which may be done only once, and
(e) each periodic
payment is not less than the required amount defined in the FA 2004, sch 30
para 4, which means level annual amounts of loan repayments pus interests throughout
the loan period.
12 By the FA 2004,
s162 “loan” does not include a debenture, loan stock etc listed of a recognised
stock exchange or offered to the public.
13 The penalty
for an infringement is an unauthorised payment charge (FA 2004, s208) of 40% of
the unauthorised payment, the amount of which it highest of the excess amounts
of the conditions in para 11 above (ib sch 30 paras 12 to 16), and
(a) an unauthorised
payments surcharge 15% (ib s209) if the unauthorised payments in any period of
twelve months exceed 25% of the value of the scheme’s assets, and
(b) a scheme
sanction charge (ib s239) of 40%
(reducible to 15% if the employer pays the tax due under s208) if two or more
scheme chargeable payments are made in any tax year.
14 The only loans
which are authorised by the FA 2004 are made
under s179. All other loans,
including loans to members, are unauthorised.
15 A loan by an investment regulated pension scheme (FA 2004 sch 29A
, part 1) to a person to fund the acquisition of taxable property (typically
residential property), is an indirect holding of taxable property (FA 2004, sch
29A para 16) and therefore taxable as an unauthorised member payment (ib s174A)
unless a specified exception apply.
15 A pension scheme ought not to charge its property as a third
party security, because (a) it is unlikely to be easy (or even possible) to
show how it could be in the beneficiaries’ best interests and (b) it is likely
to be an unauthorised payment under the value shifting provisions of the FA
copyright Roderick Ramage
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