Recycling Question

Steve182

Linton said:

The Tax Manual states...

As a rule of thumb, HM Revenue and Customs accepts that such a significant increase does not occur unless, because of a pension commencement lump sum, the amount of the additional contributions are more than 30% of the contributions that might otherwise have been expected.

I havent seen any reference to a 30% of the lump sum other than in one example regarding Salary Sacrifice .

When does the recycling rule apply?

Paragraph 3A Schedule 29 Finance Act 2004

• the cumulative amount of the additional contributions exceeds 30% of the pension commencement lump sum. Further guidance about the cumulative basis of the recycling rule is at PTM133830

From - https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133810


It's also included in example 2 below, as well as example 5, which may be the salary sacrifice example you are referring to -

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133850

Steve182

Scot_39 said:

Audaxer said:

Scot_39 said:

Why do you think it's 30% cumulatively for the % of historic contribution ?

PTM133830 - Unauthorised payments: deemed or specific situations that are unauthorised payments: recycling of pension commencement lump sums: significant increase in contributions and cumulative basis - HMRC internal manual - GOV.UK (www.gov.uk)

In the page above it says:
"The amount of additional contributions is measured on a cumulative basis to determine whether or not a significant increase has occurred."

Yes I read that - but then their specific example overrides it - as posted by Steve182 above. if it doesn't go over 30% of the lump sum taken.

So in hmrc own example the 3500 total by year 3 violates the significant increase cumulatively, but then doesn't violate the 30% of £35000, so no recycling rule triggered.

It's all a little obscure.

And how successful hmrc would ever be at proving intent - or even willing to try - given the difficulty their limited resources have dealing with bigger tax and loan issues - debatable.

I think for recycling to have deemed to have occurred, all the tests must be positive. If the exceeding 30% of TFLS (cumulative increase in the 5 measured years) test alone is negative then, nonmatter what the other results show, recycling has not occurred.

Steve182

From AJ Bell -

Published cases?

While it’s useful to have official guidance from HMRC, it’s always instructive to see how cases are pursued in practice.

In recent years we’ve seen courts and tax tribunals wrestle with a range of pension issues including taxable property, lifetime allowance protection, contributions in specie, Inheritance Tax and investment due diligence.

To date, however, we are yet to see any cases involving lump sum recycling. Therefore, we have very little to go on in terms of judicial treatment.

From a policy standpoint, it seems likely that the recycling rule was included more as a deterrent than anything, and it’s difficult to ascertain how closely HMRC monitors for potential breaches.

Certainly, the guidance says that very few payments are likely to be affected, and that PCLSs won’t be caught if paid as part of a client’s normal retirement planning.

It’s also worth noting that the annual allowance has decreased significantly since the late 2000s, meaning the ability to re-contribute significant lumps sums has also decreased. This might push it further off HMRC’s radar.

Putting this into practice

With this in mind, it’s possible you might have clients who are tempted to view such a payment as low risk. They might have unused annual allowance from previous tax years, for example, and could be inclined to use a PCLS to fund a large one-off contribution.

However, the recycling rules are clear, and if the conditions were satisfied in a given case it could be fairly straightforward for HMRC to prove it. Therefore, most advisers will flag the recycling rules with clients and head off these conversations at the earliest opportunity.

A more likely scenario is where there are already general plans for a client to take a lump sum and continue working, and therefore contributing, perhaps to a different pension scheme. In other words, the client isn’t actively looking to recycle their PCLS – it just happens that as part of their retirement planning they will receive a PCLS and they will also make contributions that are potentially higher than those they’ve made in the past.

In these situations, the key point is to make sure that any decisions around PCLS and contributions are fully documented as being part of normal retirement planning. Certainly if the PCLS is being earmarked for a particular purpose, such as paying off a mortgage, it makes sense to record this in the client’s file.

This article was previously published by FT Adviser

Linton

Steve182 said:

Linton said:

The Tax Manual states...

As a rule of thumb, HM Revenue and Customs accepts that such a significant increase does not occur unless, because of a pension commencement lump sum, the amount of the additional contributions are more than 30% of the contributions that might otherwise have been expected.

I havent seen any reference to a 30% of the lump sum other than in one example regarding Salary Sacrifice .

When does the recycling rule apply?

Paragraph 3A Schedule 29 Finance Act 2004

• the cumulative amount of the additional contributions exceeds 30% of the pension commencement lump sum. Further guidance about the cumulative basis of the recycling rule is at PTM133830

From - https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133810


It's also included in example 2 below, as well as example 5, which may be the salary sacrifice example you are referring to -

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133850

So there are two 30% limits, legally the cumulative value as a % of the lump sum and the % level of increase in the pension contributions from normal  that HMRC regard as "significant".

Steve182

Linton said:

Steve182 said:

Linton said:

The Tax Manual states...

As a rule of thumb, HM Revenue and Customs accepts that such a significant increase does not occur unless, because of a pension commencement lump sum, the amount of the additional contributions are more than 30% of the contributions that might otherwise have been expected.

I havent seen any reference to a 30% of the lump sum other than in one example regarding Salary Sacrifice .

When does the recycling rule apply?

Paragraph 3A Schedule 29 Finance Act 2004

• the cumulative amount of the additional contributions exceeds 30% of the pension commencement lump sum. Further guidance about the cumulative basis of the recycling rule is at PTM133830

From - https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133810


It's also included in example 2 below, as well as example 5, which may be the salary sacrifice example you are referring to -

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133850

So there are two 30% limits, legally the cumulative value as a % of the lump sum and the % level of increase in the pension contributions from normal  that HMRC regard as "significant".

Yes, but you have to break them both to fail the test.

I plan to recycle almost 30% of my TFLS over the next 3 years and break all the rules EXCEPT the 30% cumulative value limit, deeming recycling not to have occurred.

NedS

Steve182 said:

From AJ Bell -

Published cases?

While it’s useful to have official guidance from HMRC, it’s always instructive to see how cases are pursued in practice.

In recent years we’ve seen courts and tax tribunals wrestle with a range of pension issues including taxable property, lifetime allowance protection, contributions in specie, Inheritance Tax and investment due diligence.

To date, however, we are yet to see any cases involving lump sum recycling. Therefore, we have very little to go on in terms of judicial treatment.

From a policy standpoint, it seems likely that the recycling rule was included more as a deterrent than anything, and it’s difficult to ascertain how closely HMRC monitors for potential breaches.

Certainly, the guidance says that very few payments are likely to be affected, and that PCLSs won’t be caught if paid as part of a client’s normal retirement planning.

It’s also worth noting that the annual allowance has decreased significantly since the late 2000s, meaning the ability to re-contribute significant lumps sums has also decreased. This might push it further off HMRC’s radar.

This article was previously published by FT Adviser

I wondered this, not knowing the history / time line of when the legislation was introduced, if HMRC effectively consider this a non-issue now given the reduced AA limits.

Kismet_Hardy

Again - thank you Steve. I have had a look at the info on the government's website. They place an awful lot of emphasis on intention and it is for them to prove that there was an intention to use the lump sum to pay more into the pension.
I'm reasonably sure that I can demonstrate that there was no such intention on my part, and I doubt that they are interested in small fry like myself. The total amount I have in this pension is just under £30,000. 

        

Steve182

Kismet_Hardy said:

Again - thank you Steve. I have had a look at the info on the government's website. They place an awful lot of emphasis on intention and it is for them to prove that there was an intention to use the lump sum to pay more into the pension.
I'm reasonably sure that I can demonstrate that there was no such intention on my part, and I doubt that they are interested in small fry like myself. The total amount I have in this pension is just under £30,000. 

        

Given that your numbers are fairly modest and there seems to be no evidence of enforcement I think you would be extremely unlucky if they picked you out from the crowd.

Albermarle

Kismet_Hardy said:

Again - thank you Steve. I have had a look at the info on the government's website. They place an awful lot of emphasis on intention and it is for them to prove that there was an intention to use the lump sum to pay more into the pension.
I'm reasonably sure that I can demonstrate that there was no such intention on my part, and I doubt that they are interested in small fry like myself. The total amount I have in this pension is just under £30,000. 

        

I very much doubt that you will find the HMRC flying squad banging on your door !