What is the process of acquiring benefits from the pension arrangements and the registration of pension schemes under the tax laws formation of UK?


The blog will involve the topics of lifetime allowance (the maximum value which can be built up in the fund of pension), the benefits of pension, charge of lifetime allowance and the registration of schemes of pension. These topics will provide an insight into the matters related to pension and will prove helpful for the pensioners or the pensioners to be after their lifetime work in company formation of UK.

What is the lifetime allowance?

An individual does not have the permission to build up a pension fund that is considered to be indefinitely huge. There exists a maximum value for a pension fund for the arrangements of money purchasing or for the cost of benefits for the arrangements of defined benefits. This type of fund is known as the lifetime allowance.

For the years of 2013 and 2014, the amount of the lifetime allowance is equal to £1,500,000. It is not required by the individual to keep a running total of the scheme of pension. Rather, the testing of lifetime allowance limit is done only at the occurrence of a benefit crystallization event, such as when a member gets the entitlement of a lump sum or a scheme pension.  

Benefits of Pension

The payment of any pension cannot be made before the member gets to the normal minimum pension age of 55, until and unless the member faces an incapability due to ill health. At this age, the member can take the annuity or the income pension and a lump sum from the scheme of pension.

It is not necessary that one takes all the benefits of pension at one time. Once the minimum pension age has been reached, the vesting of benefits may be done by an individual, which means that set aside a part or all of the fund of pension in order to provide the benefits of pension. An individual whose age is less than 75 can normally make both contributions and acquire the benefits of pension.

Approximate 25% of the fund of pension for the schemes of money purchase or 25% benefits value for the schemes of defined benefit can be considered as free of tax total amount, subject to the limit of lifetime allowance. The utilization of the remainder is usually done in order to purchase an annuity to provide a scheme of pension. The taxation of the pension scheme is done in the form of non-savings income.

A substitute for purchasing an annuity is for the individual to drawdown income from the fund of pension which is usually subject to a yearly maximum amount. Again, the taxation of this income is done in the form of non-savings income.

The maximum income withdrawal that an individual can make is capped at the 120% of the equivalent annuity that could have been purchased with the value of the pension fund. An individual who can give the demonstration that they have a pension income which is secured for life, equivalent to at least £20,000 a year can only drawdown any amount of income without any yearly cap.

Charge of Lifetime Allowance

At which occasions can it be charged?

In the case when a member acquires a benefit from the scheme of pension, usually there is an event of benefit crystallization so that the testing of the value of pension fund can be done against the lifetime allowance for the year in which the event has occurred.

In most of the cases, the lifetime limit is not exceeded and there will not be any charge of income tax. In some cases, the lifetime allowance will be exceeded by the fund of pension and this will result in the occurrence of a charge of income tax on the excessive cost of the fund whose vesting has been done in order to provide either a pension income or a lump sum. The rate of charge is dependent on the type of benefit which will be taken from the excess funds.

Calculating and Paying the Charge of Lifetime Allowance

In order to provide a lump sum, when the funds are vested, there will be a charge to tax at 55% on the value of the lump sum.

In the case where the vesting of excess funds is done to provide an income from pension, the rate is then 25%. In such a case, it is mandatory to look at the value of the vested funds in order to work out the charge of tax, and not the yearly cost of the pension of income which will be provided.

Example of Exceeded Lifetime Allowance

Consider the case of Amy who got 60 years old on July 1st, 2013 and made a decision to vest her benefits of pension on that date. She has a fund of money purchase which was valued at a rate of £2,300,000 on July 1st, 2013. Amy acquired the maximum tax-free lump sum of £1,500,000 * 25% = £375,000. Then the balance of the lifetime allowance is £ (1,500,000 - 375,000) = £1,125,000 and the vesting of this is done to provide benefits of pension income from annuity. Amy also acquired the excess of the fund over the allowance of lifetime, such as £ (2,300,000 - 1,500,000) = £800,000. Hence the charge of tax is £800,000 * 55% = £440,000.

Registration of Schemes of Pension

In order for the benefits of tax as mentioned above to be applicable to a scheme of pension, the registration of the scheme should be done with HMRC.

The registration of the pension scheme may only be done if it is an occupational pension scheme or if its establishment is done by specific institutions of finance such as the banks and the insurance companies.

HMRC should register for the scheme until and unless it believes that the information in the application is not correct or that any declaration accompanied is false.

Scheme of Enterprise Investment (EIS)

The designing of enterprise investment scheme, venture capital trusts and seed enterprise investment scheme is done to help the companies of trade to raise finance once the companies house set up a new company.

The enterprise investment scheme (EIS) is a scheme whose designing is done for the promotion of enterprise and investment by helping unlisted, high-risk companies of trade to raise finance by the issue of shares to individual investors who are not connected with that UK incorporation.

What are the conditions for relief?

The individuals who have a subscription for the shares of EIS have an entitlement to both income tax and the reliefs of capital gains tax where some specific conditions are satisfied.

Investor

The investor should make a subscription for the shares entirely in cash in the company and should not have a connection with it. The connection can widely occur with the help of employment or having an ownership of more than 30% (including holdings of associates i.e. civil partner/ spouse or child, but not a sister or brother) of the issued ordinary share capital, issued share capital or power of voting of the UK incorporation company or a subsidiary.

The investor should also make a qualification for two years before and three years after the issue date of share or if later, three years from the date the trading starts.

Company

After form a company UK it should have a permanent establishment in the United Kingdom throughout the qualifying period for the relief of income tax.

A permanent establishment after form a company UK is either a fixed place of business through which the company’s business is entirely or partly carried on or an agent acting on the company’s behalf who has and habitually exercises the authority to enter into contracts on the company’s behalf.

The company should be unquoted (such as not listed on a recognized stock exchange) and the raised funds should be used by that company or by a 90% subsidiary in carrying out a qualifying trade. The qualifying trades widely involve all trades instead of specific prohibited trades, including dealing in land, financial activities, property backed activities and accountancy/legal services. Research and development before starting a trade also has a qualification.

The money raised by the issuance of EIS share should be used for this aim within the duration of two years of the issuance of shares, or within two years of the start of trade.

The company should have less than 250 full-time employees or their equivalents on the issuance date of share.

The gross assets of the company should be less than £15m before nor £16m after making the investment. The company should not have raised more than £5m in the schemes of venture capital trusts (EIS, SEIS and VCT) in the period of 12 months terminating on the investment date.

The company should fulfill the requirement of financial health after the issuance of shares. The requirement states that the company is not in difficulty according to the definition by the Community Guidelines on State Aid for restructuring and rescuing firms in difficulty.

Shares

Usually, the eligible shares are any new ordinary shares whose issuance is done for the bona fide commercial reasons that do not carry any preferential rights to assets on the liquidation of the company. The shares may carry some specific preferential rights to dividends but these are limited, such as the rights to dividends cannot be cumulative.

The payment of the shares should be fully done at the time of issue and they cannot be redeemable.

Relief for Income Tax

Reducer of Tax

The individuals can make a claim of a reducer of tax of the lower of:

  • The tax liability of the individual for the year.
  • 30% of the amount subscribed for the qualifying investments.

A claim for the EIS relief in respect of the shares issued by a company in a year of tax may be the fifth anniversary or the normal self-assessment filing date for the year of tax (which is January 31st, 2020 for an investment made in the years of 2013 and 2014).

Relief Limit

The yearly maximum for the EIS investments which qualify for the relief of income tax is equal to £1,000,000, but the individuals can make an investment in the excess of this amount if they wish.

The investor may make a claim to have the treatment of the issued shares done in the previous year of tax. While carrying back the relief, the relief given in the previous year should not be more than the EIS limit for that year.

Relief Withdrawal

The investor should hold the shares for at least three years if the relief for income tax is not to be withdrawn or lessened if the company was previously carrying on a qualifying trade at the issuance time. For the companies that were making preparations of trading at the issuance time, the minimum period of holding ends when the company, for three years, has been carrying on a qualifying trade. The main aim for the relief withdrawal will be the sale of the shares by the investor within the period of three years, as mentioned above. The consequences are dependent on the fact that if the disposal is at arm’s length or not:

  • If the disposal is at arm’s length, then the withdrawal of relief is done upon the acquired consideration. The withdrawal of relief should be done at the same tax rate.
 If the disposal is not a bargain at an arm’s length, the total amount of relief acquired originally is withdrawn.

Comments: Leave Comment

* The email will not be published on the website.