The Finance Bill has been published today. Both html and 2-vol pdf versions are available from the Parliamentary website together with Explanatory Notes (1,148 pages; pensions folk will wish to focus on pages 787 - 825). These Notes and shorter Lobby Notes for each clause and schedule of the Bill are also available as pdf downloads from the Treasury page.

The material directly relevant to pensions is contained in Part 4: three quite short Clauses 87 – 89 and two lengthy Schedules 28 and 29. No big surprises are apparent, all the significant legislative changes having been announced already, either at the time of the Pre-Budget Report (PBR) last October or the Budget earlier this month.

Clause 87 introduces a new s.199A into FA 2004 to make indirect contributions by employers to registered pension schemes subject to the rules on spreading of tax relief. It applies where an employer makes a payment intended to facilitate a large pension contribution relative to the contribution in the previous year. This clause ensures that the relief the employer is entitled to for such a payment is subject to the same tax treatment as if it were a contribution under a registered pension scheme made directly by the employer. It is designed to close a loophole whereby some employers have been seeking to avoid spreading of contributions by interposing a new company and financing it to pay the pension contribution. A draft of this legislation was published at the Pre-Budget Report on 9 October 2007.

Clause 88 introduces Schedule 28 which ensures that scheme pensions and lifetime annuities are used to provide an income for life and not as a means of diverting tax-relieved pension savings into inheritance. This makes the treatment of scheme pensions and lifetime annuities consistent with that of alternatively secured pensions. Sch 28 amends how the unauthorised member payment tax charges have effect for registered pension schemes and their members when there are assignments, surrenders and increases of benefits after death. It also makes changes to the inheritance tax (IHT) provisions in respect of registered pension schemes.

After consulting last March (see Aries article), five pages of draft legislation amending IHTA 1984 and FA 2004 ss.172 (assignment), 172A (surrender) and 172B (increase in rights of connected person on death) were published, with further details last October in PBRN 15.

Clause 89 and Schedule 29 (see page 133 of pdf Vol 2) are more wide-ranging, as the amendments they make to FA 2004 and IHTA 1984 give schemes additional flexibility, amend regulatory powers, clarify the law, deal with the transition to the new regime, ensure that scheme pensions and lifetime annuities are used to provide an income for life and prevent abuse of the rules.

Of particular interest is a new subsection (2) introduced into s.164 FA 2004 (Authorised member payments). This new subsection widens the existing regulation-making power, in what becomes s.164(1)(f), to treat certain payments prescribed in regulations as authorised member payments by providing a power for such regulations also to:

• Treat all or part of those payments as pension income under Part 9 of ITEPA 2003 or as authorised lump sums;
• Provide for all or part of the payments to be subject to tax as short service refund lump sums (Sch 29 para 5 FA 2004) or as lump sum death benefits (Sch 29 Part 2);
• Provide that the lifetime allowance charges under s.214 may apply in respect of the payments; or
• Have retrospective effect where this does not increase any person’s tax liability.

This is the solution HMRC has devised to partially address, for the time being at least, the serious problem of the large volume of unauthorised payments created by the current legislation (see Aries article). The amended power will be used to provide four new regulations to ensure certain payments are treated as authorised payments when:

• There is an overpayment of an ongoing pension;
• A pension continues to be paid after the member has died;
• Certain payments are made after the member has died where payment before death was not possible; and
• Certain trivial commutation payments are made to allow “stranded” pots to be commuted as lump sums and to allow a de minimis limit for commutation payments by occupational schemes.

A new category of benefit crystallisation event (BCE 9) is created where amounts are treated as having crystallised in accordance with regulations made under what becomes s.164(1)(f).

Among the other changes:

• Sch 29 para 5 changes the description of BCE 3 (scheme pension increases above a specified amount) in s.216(1) so as to exclude increases lower than or equal to the "threshold annual rate" (a new concept introduced to Sch 32 FA 2004 by para 9 of this Schedule). The new legislation even provides for when the increase in a scheme pension occurs on 29 February in a leap year.
• Sch 29 para 13(1)(a) amends para 2(5) of Sch 29 as modified by Sch 36 in connection with the alternative permitted maximum formula for calculating additional tax-free lump sums (ALSA). It fully removes the requirement for "relevant benefit accrual" to have occurred under the pension scheme, and in relation to the individual member, as a condition of the alternative permitted maximum formula applying. To apply this formula to the additional lump sum it will be sufficient merely for the value of the member’s funds or rights under the scheme to be more than the 5 April 2006 value as increased in line with the increase in the standard lifetime allowance.
• Sch 29 para 17 provides that in relation to pension costs no sums other than contributions paid by an employer to an exempt approved pension scheme shall be allowed to be deducted in computing the amount of the employer's profits. In other words deductions are only allowed for contributions: no deductions in respect of other provisions in connection with exempt approved pension schemes are allowable.