Landmark ruling puts pension tax relief in jeopardy

Thousands of savers could face big bills from the taxman following a landmark legal ruling that non-cash contributions to their pension plans should not have been given tax relief. The ruling by the Upper Tribunal court, which considers specialist tax cases, potentially affects anyone who has made an in specie contribution to their pension plan: directly transferring assets such as shares or commercial property into their savings rather than simply paying in cash.

For many years in specie contributions were popular and regarded as perfectly normal, with providers applying to HM Revenue & Customs for tax relief on the value of such contributions in the same way as cash savings qualify for relief at the taxpayer’s marginal rate of income tax. HMRC’s own guidance also suggested this was acceptable.

In 2016, however, HMRC began blocking such applications amid claims the system was being abused. That prompted Sippchoice, a leading provider of self-invested personal pensions (Sipps), to mount a legal challenge against the tax authority. Last week the court ruled in favour of HMRC.

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The judgment has sent the pensions industry into a spin. HMRC is in theory now entitled to ask pension providers to repay the tax relief they secured on behalf of clients. In which case, many providers may seek to pass the bill on to their customers.

Will HMRC be lenient?

Experts are appealing to HMRC to take a lenient approach, rather than pursuing reclaims, particularly since its own guidance prior to 2016 seems to have been based on a misunderstanding of the law. Some hope that pension providers’ indemnity insurance might cover the cost of any payments they may be asked to make to HMRC. However, the ruling is a potential threat to the pension savings of thousands, with the industry estimating tax-relief repayments could run into tens of millions of pounds.

While HMRC’s first port of call for tax-relief repayments would be providers themselves, the terms of most pension plans would enable the industry to try to recoup its losses from individual savers. That could see providers take funds out of savers’ pension plans or, in extreme circumstances, take legal action against savers who have already cashed in their pensions. Sippchoice itself said it was considering an appeal against the judgment. A more junior court had previously ruled against HMRC. However, in the meantime Sipp and small self administered scheme (SSAS) providers are scrambling to understand how savers might be affected.