Responding to news that HMRC has published guidance on the tax issues associated with implementing GMP equalisation, Samantha Brown, head of pensions at Herbert Smith Freehills’, says “the guidance will cause concern for trustees because it raises the prospect of members losing protection against the lifetime allowance charge and incurring additional tax charges in some circumstances.”
The guidance is limited in scope as it only relates to benefit adjustments where the reason for adjustment is solely GMP equalisation.
Against this backdrop Samantha Brown says: “It is good to finally begin to get some clarity on how HMRC plans to approach the issues associated with GMP equalisation. However, the guidance will cause concern for trustees because it raises the prospect of members losing protection against the lifetime allowance charge and incurring additional tax charges in some circumstances. As a result, trustees may find themselves in the unenviable position of having to choose between jeopardising the tax protected status of certain members or not complying with the Lloyds judgment.
“The guidance will also place additional administrative burdens on trustees and members. All in all it demonstrates why a statutory solution to these issues should be found to reduce the burden on schemes and avoid the prospect of members' facing significant tax bills through no fault of their own.
Although the guidance sets out HMRC’s views on how adjustments made as part of a GMP equalisation process should be treated for annual allowances purposes and testing an individual’s benefits against the lifetime allowance, there are some aspects not covered.
Brown says: “The guidance also leaves a lot of important questions unanswered. In particular, it does not address the tax issues associated with GMP conversion, lump sums or death benefit payments. The lack of guidance on GMP conversion is particularly disappointing as this is likely to be the favoured method of implementing equalisation for many schemes and several conversion projects are currently on hold pending guidance from HMRC.
“If anything, the guidance is likely to make trustees even more nervous about going down the conversion route as it raises the prospect of members losing protection against the lifetime allowance tax charge if they do, but it fails to provide clarity either way. HMRC has said that it will issue further guidance on these points as soon as possible and this cannot come soon enough."