Can husband give his 25% tax free sum to me to reinvest in my pension pot?

bigadaj

RickyB2000 wrote: »

I wasn't ignoring it, I just find the term in respect of unclear. For example, if you hand your spouse money to invest in their pension with a written agreement that they would pay you that money back plus the additional tax saving, would it now be considered in respect of the husband? Even though the scheme was not in the husbands name?

It all feels a bit flimsy, anyone who is wealthy probably has their own business so can easily re-org who earns the money in their relationship and by-pass recycling rules. I guess in this case they probably will also be earning money 3 years down the loan so would be able to break the recycling rules anyway. Only PAYE schmuks really get hit.

Hmrc aren't there to provide tax planning for you, they are there to maximise the amount of tax the government can receive.

You either read the rules and guidance and form your own opinion, or pay an accountant to do that work for you and he covered by his insurance.

Once many loop holes are well known and advertised they often tend to get closed, for the practical reason that if sums are involved are small it's not worth bothering with, but once sums become significant then much additional revenue is at stake. Just look at the issues around higher rate tax relief on pension contributions, tax relief in buy to let etc etc

SippTechie

In support of the answers given by PensionTech and others, back in 2014 the firm I work for sent a query to HMRC regarding a similar situation.

We queried a situation where an individual received their tax free cash, gifted some of this to their spouse, and the spouse made a significant contribution to their pension. We asked whether this would be caught under the recycling rules, indicating that we thought it would not because the contributions paid by the spouse were not paid into a registered pension scheme "in respect of the individual" who had received the tax free cash.

We were told in writing that we were interpreting the legislation correctly and that this would not be caught by the recycling rules.

Worth mentioning that it is potentially important that the tax free cash is paid to the original member first, and not directly to the spouse. We've recently received confirmation in writing that payment of tax free cash to someone other than the original member (for example directly into a bank account in the name of their spouse) is potentially going to lead to tax charges. It is possible this could be challenged successfully if a case ever arose, but perhaps best not to test that out!

PensionTech

It's simple. You make pension contributions out of your own earnings into your pension. Your husband uses his TFLS to pay towards your joint living costs. No gifts. No recycling.

To be fair, this argument wouldn't hold if they actually were recycling the lump sum. All that is required is for the pension contribution to be substantially larger than it would be if not for the lump sum; the lump sum itself doesn't have to be directly used for the contribution (and in an age of digital money, who can really pinpoint which type of money is directly used for a particular purpose?). If you're paying a higher contribution out of your earnings, but the reason you can pay it out of your earnings is because you have a lump sum to spend on what you'd usually spend your earnings on, it's still recycling (if it's going into your own pension pot).

But because it's not going into the same person's pension pot, it's a moot point, and I'm thoroughly relieved that SippTechie has come in here with some real-life evidence to settle those who seem to want to believe that HMRC's rules go further than they do!

RickyB2000

I don't think I at any point said I wanted HMRC rules to mean that you couldn't do that. I was driving a debate around the question. The fact the real life example had to write to HMRC shows it is not clear cut. I don't make any appologies for challenging unsubstantiated claims made by random forum posters

dunstonh

RickyB2000 wrote: »

I don't think I at any point said I wanted HMRC rules to mean that you couldn't do that. I was driving a debate around the question. The fact the real life example had to write to HMRC shows it is not clear cut. I don't make any appologies for challenging unsubstantiated claims made by random forum posters

What does your accountant or IFA say then?

PensionTech

unsubstantiated claims made by random forum posters

Oh dear - this is a poor choice of words. You'll find that many people on the opposite side of the argument to you work in pensions in a professional capacity. You can see from my signature that I get paid to interpret legislation and a pensions administration company relies upon those interpretations. I have substantiated my claims by reference to the legislation itself, and others have referred to official HMRC guidance and parliamentary evidence, all of which supported what we said and didn't give any hint of what you claimed. I don't believe that we should be called "random forum posters" any more than you yourself, given our collective number of contributions to this forum (particularly big hitters like dunstonh and jamesd). What were your claims substantiated by?

Of course it's healthy to be sceptical of what people say on the internet - but in this case I think it was just bloody-mindedness.

jamesd

RickyB2000 wrote: »

The fact the real life example had to write to HMRC shows it is not clear cut.

You might want to learn about the scheme sanction charge. The scheme would have had to pay a penalty for allowing an unauthorised payment if the rule had been breached so it was prudent for the scheme to check.

You'll also find that most or all pension schemes will ask about recycling at appropriate times and ask you to say that you're not going to do it, so they can follow up with you or just refuse as seems desirable to them.

jamesd

RickyB2000 wrote: »

I wasn't ignoring it, I just find the term in respect of unclear.

In plain language in respect of means in the name of.

It's not written that way because there are group schemes that could be paid into and which the individual could benefit from and the in respect of wording includes those within the rule.

RickyB2000 wrote: »

For example, if you hand your spouse money to invest in their pension with a written agreement that they would pay you that money back plus the additional tax saving, would it now be considered in respect of the husband? Even though the scheme was not in the husbands name?

No, because it was not in respect of the husband, not being in his name or a group scheme from which he would benefit.

Had the wife instead lent him the money which he then used to pay into a pension and repay her from the higher lump sum then it could be covered by the recycling rule if all of the other conditions were met.

Whether gifts between spouses who are both making contributions into schemes in their own names could be construed as loan agreements would depend on the facts of the case.

Have you read the HMRC examples on when the rule does or doesn't potentially apply? They are a few pages on from the one I linked to earlier.

RickyB2000 wrote: »

It all feels a bit flimsy, anyone who is wealthy probably has their own business so can easily re-org who earns the money in their relationship and by-pass recycling rules.

It may seem flimsy but it has done its job. Remember my post earlier where I explained what the rule was intended for? The rule has worked, there are not organised schemes doing recycling for large numbers of people and there are not lots of employers using recycling to pay employees. So HMRC has successfully protected the revenue, the objective of the rule.

RickyB2000 wrote: »

I guess in this case they probably will also be earning money 3 years down the loan so would be able to break the recycling rules anyway.

That isn't breaking the rules, though, it's a case that they explicitly do not block. As with many tax rules it's possible to plan to avoid being negatively affected and paying more tax if you know the rules and plan your finances to avoid the extra cost.

RickyB2000 wrote: »

Only PAYE schmuks really get hit.

I wouldn't say so. Remember that to date there are no known cases of HMRC applying the rule. But people can be excessively worried just by the existence of the rules and not plan efficiently as a result, which is what you were encouraging, whether you knew it or not.

But going beyond that, consider this PAYE case that really happened:

1. a person had a work salary sacrifice scheme that had a limit of 50% of base pay being used for contributions to the pension.
2. in the third tax year before the tax year in which the person reached age 55 the person asked the workplace to make an exception to that rule, which was intended just to prevent employees getting into financial trouble by sacrificing too much.
3. the higher pension contribution allowed by that would raise the pension contributions in the tax year before the two years before, year of taking the lump sum and two years after, potentially reducing the amount of increase that could be attributed to the taking of the pension lump sum three years later.
4. they didn't even have to explain to the person on the phone about recycling rules - that person immediately recognised the potential recycling situation and implicitly from the request also knew that the person making the request had a clue as well.
5. the employer agreed. After all, having satisfied that the employee wasn't being foolish, the employer also saved some NI.

The person wasn't a schmuck, just someone who knew the rules and wanted to stay within them by ensuring that they weren't affected by one of the rules. I doubt that the person would have been caught by the rules anyway but there's no harm in ensuring that multiple parts of the recycling rule aren't going to apply, as extra protection.

But it doesn't even take thinking three or four or more years ahead for a PAYE person to benefit if they wanted to. You can do it by thinking ahead about eight weeks, the time it might take to get HMRC relief:

Just pay in £10,000 a year gross, £8k net, each year and withdraw the money once the tax relief has arrived. Repeat every at least twelve months form age 55 until age 75 or until you stop earning enough to pay in 10k. Since the lump sum involved is £2,500 this isn't affected by the recycling rules.

Money in, 8000, tax free out, 2500, after 20% tax on the other 7500 is 6000. So out of 8500 - in 8000 is a gain of £500 every twelve months. Assuming that it's all done at basic rate tax.

Lots of people don't know the rules and what can be done but that doesn't mean there is no potential to benefit once the rules are explained to them. Which is part of what is done in this place.

xylophone

who seem to want to believe that HMRC's rules go further than they do!

I don't think they "want to believe" - I think it is more a case of "fearful lest HMRC's rules go further/catch more than it appears"?:eek:

If the "man in the street's" interpretation of the rules, or even a tax barrister's interpretation of the rules were cast iron in law, there would not be court cases arguing the toss?:)

RickyB2000

I can't see forum sigs as on a mobile. And yes, I consider myself a random forum poster and wouldn't expect or be offended if anyone didn't take what I said at face value without questioning or doing their own research. I do appologise if using that term has caused offense, but I don't think it is wrong to look at it in that way. As Duntosh says, if I was actually looking to do this I would be asking/paying for someone else's advice and not just relying on a forum board (no matter how clued up the posters are). Esp when it comes to interpretation of the law where as I understand if I get it wrong it could be costly and I assume none of you are going to compensate me. Or maybe I am just being too cautious......

I don't think I made a statement at any point that this was definitely against rules. Initally I postulated it may be and then was presented with links and interpretations of the law none of which clearly stated whether this was approved by HMRC. So I challenged this with other possible interpretations. There was some bloody mindedness but because I wasn't totally satisfied with the responses.

Anyway, thank you to all who actually responded to my various arguments, it has been very illuminating and opens up a new avenue to explore further.