Lifetime Allowance Charge and Family SIPPS
As the deadline for the reduction in the lifetime allowance to £1.25m draws nearer, there have been a number of ‘creative’ suggestions about how the change can be dealt with, other than via the use of transitional protection. One example that has crossed our desk is the family SIPP.
The theory behind using the family SIPP relies on an idea which has been around for some years: that investment growth in a common SIPP fund can be allocated between the family members in a way that is not proportionate to the size of their holdings. Thus the family SIPP’s proponents suggest Dad could choose to have 2% growth on his SIPP, helping him keep within the lifetime allowance, while allowing the excess return above 2% to be allocated to Son and the other family members.
Whether such a manoeuvre is permitted by the legislation is subject to some disagreement among family SIPP providers and pension lawyers. Crucially it will also depend upon HMRC’s views on the precise terms of the family SIPP, which varies between providers. The starting point is to ask whether such an allocation of fund value between members is an authorised payment. If it is not then the Finance Act 2004 legislation means it is unauthorised:
• It is unclear how an allocation could fit within any of the defined categories of authorised payments in s164 of Finance Act 2004.
• s172A of Finance Act 2004, introduced by Finance Act 2005 and strengthened by the Finance Act 2008, states that a surrender of ‘any right in respect of any sums or assets held for the purposes of any arrangement under the pension scheme’ is an unauthorised payment to the member. HMRC’s views on the legislation can be seen in RPSM09100172.
To date there have been no reports of HMRC challenging family SIPP growth allocation, but then those providers promoting the idea would presumably not be filing Event Reports detailing such allocation exercises in the first instance. One point to remember is that if there is an unauthorised member payment, then as well as a 55% (or possibly 70%) tax charge, the member will have foregone all of the allocated fund growth, so would be in a worse position than suffering a lifetime allowance charge on the allocated amount. The recipient of the allocated growth might also have annual allowance issues to deal with.
It is perhaps easier to see how this could work with scheme pensions rather than active member funds, as the former give more scope for reviewing valuation and return considerations in a multi-member fund. Anyone considering the growth allocation mechanism needs to be aware of the potential risks involved. These are not only to be found in current legislation, but also the possibility that it may be blocked by future legislation or attract a GAAR challenge.