§ Mr. Matthew BanksTo ask the Chancellor of the Exchequer if he will make a statement about the tax treatment of small self-administered pension schemes which breach the conditions on which they receive approval for tax purposes.
§ Sir George YoungThe tax approval system gives pension schemes very favourable tax treatment if certain conditions are met concerning the amount, timing and form of the benefits to be paid. The purpose of the tax reliefs is to encourage the provision of pensions to employees during their retirement.
Arrangements are now being encountered under which the trustees of some small self-administered occupational pension schemes have exploited the tax approval system. These arrangements involve initially taking advantage of the tax reliefs but then engineering loss of tax approval when access to the accumulated funds, in circumstances not allowed by the tax approval conditions, is desired by the scheme members or the sponsoring employer. An example is where the scheme wishes to lend all or a large part of its funds to the sponsoring employer.
The tax approval system is not intended to be used in this way. Arrangements of this kind undermine the pensions purpose for which the tax reliefs are given. Where a pension scheme wishes to take advantage of those reliefs it must accept all the conditions on which approval is granted.
In order to discourage the misuse of the tax approval system in this way a special 40 per cent. tax charge will be levied on the value of funds held by these schemes at the time tax approval is withdrawn. The new tax charge will apply where tax approval ceases on or after today. Further details are given in an Inland Revenue press release published today.