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At last – a simple guide to in-specie contributions

In-specie contributions have been big news since A-Day made them a viable option for SIPPs. The biggest moan we get is that it seems like a good idea – but getting your head around the procedures is a pain in the neck. This seems to be due to the fact that there has never been a simple, plain English guide to how it all works – until now!

What follows is a neck pain free guide to the possibilities, the practicalities and the pitfalls to avoid.

Cashless Contributions

Since 6th April 2006 it has been possible to pay contributions in the form of assets, rather foppishly known as “in specie” contributions. However HMRC will tell you there’s no such thing! Contributions have to be in monetary amounts and you can’t just say “I am contributing 10000 shares to my SIPP”. Instead you have to speak in code.

The Debt

If the shares are valued at £20,000 you first create a “debt” by making a written promise to pay a £20,000 contribution. You then confirm separately that the debt will be fulfilled by the transfer of shares. In an ideal situation this is ‘end of story’ but there are ramifications.

Firstly, however briefly the debt is expressed it is an irrevocable commitment and enforceable in law. If the shares plummet in value, the balance will have to be made up or else it will be treated as an unauthorised payment and subjected to the draconian charges. Only if the debt is small can the administrator write it off as not cost effective to pursue.

Contribution Date

The date of the contribution is when the asset changes hands; the completion date for a property, or the contract date for a share transfer, not the date of the promise, which is why there can be fluctuations in the value between the two dates.

A little bit higher, or a little bit lower

If £20,000 was promised but the shares were worth £21,000 at the time of transfer, the extra £1,000 could be documented as a further contribution or be returned in cash or in kind, but the latter might prove messy and the value could change again. Cash returns have to be based on formal valuations; they can’t be seen as a means of cashing in the asset.

If the shares were worth £19,000 an additional contribution of £1,000 would be needed.

Timing

A noteworthy issue is year ends. If there was a delay, for instance with a property completing, the debt might be in one tax year and the contribution in the next, and count towards that year’s Annual Allowance. This might not be what’s wanted.

A member contribution and the relevant tax relief could also happen in different tax years or, if not the same, in different Pension Input Periods. The same could apply with Company contributions and accounting years.  The significance of this will vary with circumstances, but the date of committing to an in-specie contribution needs careful thought.

Capital Gains Tax

The contribution date triggers a “disposal” and possible CGT liability for the asset concerned. However it also means there will be no CGT on future disposals, so if shares are transferred in when values are low, it not only leaves more room for future growth but is also effective in minimising the overall Capital Gains liability.

Again, tax year ends need to be watched. For quoted investments the disposal date is the effectively the date of the contribution so there is never the problem of different tax years. However for property the disposal date is the date the sale is agreed, so it’s possible to have the CGT liability in one year and the contribution in the next.

Depending on the type of asset, Stamp Duty may also be due, and some properties may be subject to VAT, which the SIPP may be able to reclaim.

Limits

In-specie contributions are counted towards the Annual Allowance along with cash ones, and the same conditions apply.

Members’ contributions, including basic rate tax relief, can be 100% of earnings subject to a maximum in the 2008/9 tax tear of £235,000, so an asset worth up to £188,000 could be tax relievable. Higher rate tax relief can be claimed via the member’s tax return.

If contributions from all sources exceed the Annual Allowance for the Pension Input Period, usually but not always the tax year, then 40% tax is due on the excess.

Advice needed

What’s basically quite straightforward is therefore not without its pitfalls, and quality advice is an essential. A lot of SIPP providers shy away from in-specie contributions altogether, but we see no reason why. Administratively it’s no great problem and the difficulty comes at the planning stage. This is very much a case of looking before leaping, but potentially very attractive for your clients.

Sep 8, 2008