In specie contributions

'In specie' is a Latin term meaning 'in the actual form'. Transferring an asset 'in specie' means to transfer the ownership of that asset from one person/company/entity to another person/company/entity in its current form, that is without the need to convert the asset to cash.
Key facts
  • Eligible shares can be transferred at their value at time of transfer.
  • Other assets can be transferred to satisfy a promised level of contribution - if the value turns out to be less than the promised contributions, the contributor has to make up the difference.
  • Tax relief is given in the normal way.
  • The transaction may be subject to CGT and/or stamp duty land tax.
  • There are other options but each has its disadvantages.

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In specie transactions can involve pension schemes in two different ways - in specie transfers and in specie contributions. This article explains how in specie contributions work.

Let's assume that a member of a pension scheme wants to contribute assets into his or her pension scheme. The assets have been properly valued and the assets are acceptable to the pension scheme. As this is just a way of paying contributions, the usual limits for tax relief apply - contributions mustn't exceed the higher of 100% of earnings in the tax year and £3,600.  The contributions also count towards the annual allowance, money purchase annual allowance (MPAA)and tapered annual allowance (TAA).

Eligible shares

Shares acquired under savings-related share option schemes (SAYE) or share incentive plans (SIP) are explicitly allowed by the Finance Act 2004 to be transferred to a pension scheme.  These will automatically qualify for tax relief as contributions if they are rolled over into the pension scheme/arrangement within 90 days of the member becoming the owner.

PTM042100: Transfers of certain shares from Save As You Earn (SAYE) option schemes or share incentive plans

Other assets

Assets that are not eligible shares can also be contributed to a pension scheme as in specie contributions.

This is done by undertaking to pay a specified monetary contribution to a pension scheme. This must create a legal, irrevocable debt owed to the scheme. This debt is then settled by transferring assets worth the amount of debt.

As usual, assets have to be valued at their market value and the valuation submitted to the trustees or scheme administrator. This is the value of the asset at the date it is transferred to the pension scheme.

If the trustees and/or scheme administrator accepts in specie contributions, the process can be used to accept personally owned shares, fund holdings and property in the place of the promised monetary contribution. Other types of assets may also be considered by the pension scheme.

Tax relief and costs involved

Because the transfer is in effect a contribution, it's entitled to tax relief in the normal way. So if the contributions would normally get tax relief at source, basic rate tax relief on the value contributed will be paid by HM Revenue and Customs (HMRC) into the plan with any higher rate relief being claimed through the members self-assessment. Some pension schemes might choose to pre-fund this tax relief and some will continue to apply it to the pension arrangement once it arrives from HMRC.

The member transferring the ownership of the asset will be liable for any capital gains tax on any gain in the asset since they acquired it.  Stamp duty land tax or other taxes may apply, depending on the type of asset involved and are payable by the Self Invested Pension Plan (SIPP) or Small Self Administered Scheme (SSAS).

There may be other costs involved, for example there could be broker charges.

The process is a relatively complex one so any pension providers and/or scheme trustees that decide to allow contributions to be made in this way are likely to make a specific 'in specie contribution' charge payable by the SIPP or SSAS.  Other taxes may also apply.

Any problems?

Well, yes unfortunately.

There's no problem with eligible shares as these are just transferred over and the value of them at date of transfer treated as the amount of the contribution.

However with other assets, the market value of the asset has to exactly match the contribution promised.

So if, say, the member creates a debt to the scheme of £10,000 and the asset's value turns out to be £9,000, the trustees or scheme administrator has to pursue the member for the extra £1,000.

If, in the above example the asset turned out to be worth £11,000, the scheme would have to refund the £1,000 or the member could choose to treat the extra £1,000 as a further contribution.

If a refund to the member is being made, this could be done either as a cash payment or (in the case of, for example, shares) by a reverse in specie contribution.

If the assets being contributed are shares, it is very likely that, because of the volatile nature of share values, there will be a discrepancy between the value of the promised contribution and the value of the assets transferred. This can also apply to other types of assets.

If the asset being contributed is commercial property, there's much less likely to be a difference to be resolved because of valuation fluctuations. There is however the potential nightmare scenario of a contribution of, say, £150,000 being promised and the property turning out to be unacceptable to the pension scheme. The trustees or scheme administrator would then have to pursue the member for a contribution of £150,000!

It's not permissible for the scheme to guarantee acceptance of the asset in advance. However, it is acceptable for the scheme to give the member an informal confirmation of suitability, which stops short of being a legal commitment to accept.

Any other ways of doing it?

Yes, there are but inevitably each has different advantages and disadvantages.

Sell the assets first

The simplest way of someone making a contribution to a pension scheme equal to the value of assets held would be to sell those assets and pay the proceeds into the pension scheme.

This avoids the potential problems with an in specie contribution and allows someone who doesn't initially have the cash, to make a substantial contribution to their pension scheme.

Tax relief will be given on the contribution as normal. CGT may be payable on the sale of the assets.

The disadvantages are that the assets don't end up in the pension scheme, unless its the pension scheme that buys the assets. This could involve a delay and values may have moved in the meantime.

Pay cash contribution first

The member could pay a high enough amount into the pension scheme so that, with the addition of tax relief, the scheme has enough to buy the assets.

This has the advantage of simplicity but is only practicable if the member has enough cash to pay the contribution in the first place and the pension scheme trustee or scheme administrator is willing to buy the asset.

Conclusion

Due to the risks and complexities involved, contributions paid in specie are relatively uncommon.  This has been a focus of HMRC's attention recently and they have refused to grant tax relief in some cases. 

Notes

The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.

All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.

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The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.