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Extracting Basic Rate Tax Relief to outside SIPP wrapper/ Put-through transactions

shootingstar
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Extracting Basic Rate Tax Relief to outside SIPP wrapper/ Put-through transactions

#281198

Postby shootingstar » January 30th, 2020, 4:50 pm

Hello to all Pensions experts outside there, is anyone here familiar with the mechanics of a "put-through" transaction involving a SIPP?

In short, i am a higher rate tax payer and have always been curious about the situation where if i make personal contributions then a) I receive basic rate tax relief that stays inside the SIPP wrapper b) I claim higher rate relief via my tax return but this money is effectively outside the SIPP wrapper

is there anything legally saying that basic rate relief must remain inside the wrapper?

I have been looking into so called "put through" transactions where
1. You make a personal SIPP contribution of say £20k, which then gets grossed up by basic rate relief to £25k
2. You effectively sell £25k worth of shares you hold outside the SIPP wrapper to your SIPP via a broker. Those shares then show in the SIPP with value £25k and £25k cash is then sat outside the SIPP. Hence the maths is that the basic rate relief is effectively extracted from an economic point of view and you can still claim higher rate relief also

The advantage of doing this is that I still get full tax relief on contributions but by extracting the basic rate relief, more money is sat outside the SIPP that I can easily access

is anyone actively doing this kind of strategy?

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Re: Extracting Basic Rate Tax Relief to outside SIPP wrapper/ Put-through transactions

#281213

Postby Chrysalis » January 30th, 2020, 5:46 pm

I don’t think you have extracted the tax relief by doing what you have described.
The basic rate relief is still inside your SIPP.
All that has happened is you have sold some unwrapped shareholdings. You don’t actually have any more money outside the SIPP than you started with. If you wanted to convert these to cash you could do that at any time, irrespective of pension contributions.

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Re: Extracting Basic Rate Tax Relief to outside SIPP wrapper/ Put-through transactions

#281285

Postby parallellines » January 31st, 2020, 12:10 am

shootingstar wrote:
is there anything legally saying that basic rate relief must remain inside the wrapper?


The basic rate relief has to remain in the scheme, unless you can make the pension contribution via an employer that operates a net pay arrangement.
See https://www.moneyadviceservice.org.uk/e ... ce-pension

But it really doesn't matter. You get the same outcome (same net pay and same SIPP fund value) by contributing £8 to a relief at source arrangement that you would by contributing £10 to a net pay arrangement.

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Re: Extracting Basic Rate Tax Relief to outside SIPP wrapper/ Put-through transactions

#281425

Postby shootingstar » January 31st, 2020, 3:10 pm

thanks Chrysalis and parallellines for your responses. I am still looking into this and plan to speak with an adviser soon before implementing what i am contemplating

To clarify what I mean I am writing below how this might work in more detail via a worked example. Do you guys or anyone else have any thoughts on my maths?...I think it is correct, but i am prepared to be corrected!

Starting position
1. £20k cash in bank account
2. £25k in standard investments in a standard dealing account like shares or index funds e.g. Hargreaves Lansdown Fund & Share account

Total £45k: all outside a SIPP

Strategy
1. Put your £20k cash into your SIPP then wait until this is grossed up to £25k by basic rate relief given by the government
2. Buy the £25k standard investments (shares/index funds) in the SIPP from yourself via a market maker i.e. arms length transaction in a so called put through arrangement

Ending Position (ignores dealing costs, likely small if dealing with index funds)
1. £25k in cash in a standard dealing account from selling the prior investments (sits outside the SIPP wrapper, can be moved to bank account)
2. £25k in shares/index funds inside the SIPP wrapper

Total £50k ( £25k inside wrapper, £25k outside wrapper)
This total ignores extra higher rate relief via tax return, £5k if a 40% rate payer (comes in form of a cash rebate via tax return, and is outside the SIPP wrapper). Effectively would have £55k

So ignoring the high rate relief, your cash position outside the SIPP is effectively enhanced by £5k, which is the basic rate tax relief.

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Re: Extracting Basic Rate Tax Relief to outside SIPP wrapper/ Put-through transactions

#281467

Postby Alaric » January 31st, 2020, 5:08 pm

shootingstar wrote:Starting position
1. £20k cash in bank account
2. £25k in standard investments in a standard dealing account like shares or index funds e.g. Hargreaves Lansdown Fund & Share account

Total £45k: all outside a SIPP


So ignoring the high rate relief, your cash position outside the SIPP is effectively enhanced by £5k, which is the basic rate tax relief.


Previously your net wealth is £ 45k, all outside a SIPP
Afterwards your net wealth is £ 50k, £ 25k inside a SIPP, £ 25k outside. If you want the £25k in the SIPP back, it's going to be held until the age of 55 and only given back subject to tax.

You could equally have sold the dealing account investments and then later repurchased them inside the SIPP. The method described might gain on spreads and stamp duty, but that's about it.

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Re: Extracting Basic Rate Tax Relief to outside SIPP wrapper/ Put-through transactions

#281500

Postby pochisoldi » January 31st, 2020, 7:54 pm

parallellines wrote:
shootingstar wrote:
is there anything legally saying that basic rate relief must remain inside the wrapper?


The basic rate relief has to remain in the scheme, unless you can make the pension contribution via an employer that operates a net pay arrangement.
See https://www.moneyadviceservice.org.uk/e ... ce-pension

But it really doesn't matter. You get the same outcome (same net pay and same SIPP fund value) by contributing £8 to a relief at source arrangement that you would by contributing £10 to a net pay arrangement.


If you can put earnings which would have been taxed at 0% (i.e. covered by the personal allowance) into the pension, you will get a 25% uplift on that money from HMRC.

Put another way your average basic rate tax payer who puts, say , £5k (gross) of their £25k (gross) earnings into a pension, will pay tax at 20% on that £5k at 20%, and will put £4k net into the pension. HMRC will then hand over tax relief to the pension provider.

So it's £5k (gross) earned, £1k tax deducted, £4k (net) into the pension, £1k tax relief into pension, total £5k gross into pension.

But it that same tax payer paid in £15000 (gross) into their pension, £12500 of that income would have been taxed at 20%, and the remaining £2500 would have been taxed at 0%.

So that's £15k (gross earned), £2500 tax deducted, £12k (net) into the pension, £3k tax relief into the penson, total £15k into pension.
So that's £2500 tax paid on that money, but £3000 goes into the pension.

So in the OP's case, shoving £X of earnings into the pension, and replacing it with £X raised by selling shares achieves the aim of "extracting" basic rate tax relief, but only for earnings which would have otherwise been covered by the personal allowance.
It hasn't really been "extracted", it's just that a slice of income that was effectively received gross, and then paid "net" into the pension where it got grossed up.

This isn't a new thing, its a new way of looking at an old thing - when they brought in the £3600 regardless of earnings pension input allowance in 2006, it was highlighted on the finance pages as a way of getting HMRC to stick £720 a year into a non-working spouse's pension at the price of locking up £2880 in a pension wrapper.

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Re: Extracting Basic Rate Tax Relief to outside SIPP wrapper/ Put-through transactions

#281620

Postby Chrysalis » February 1st, 2020, 4:20 pm

shootingstar wrote:
Starting position
1. £20k cash in bank account
2. £25k in standard investments in a standard dealing account like shares or index funds e.g. Hargreaves Lansdown Fund & Share account

Total £45k: all outside a SIPP

Strategy
1. Put your £20k cash into your SIPP then wait until this is grossed up to £25k by basic rate relief given by the government
2. Buy the £25k standard investments (shares/index funds) in the SIPP from yourself via a market maker i.e. arms length transaction in a so called put through arrangement

Ending Position (ignores dealing costs, likely small if dealing with index funds)
1. £25k in cash in a standard dealing account from selling the prior investments (sits outside the SIPP wrapper, can be moved to bank account)
2. £25k in shares/index funds inside the SIPP wrapper

Total £50k ( £25k inside wrapper, £25k outside wrapper)
This total ignores extra higher rate relief via tax return, £5k if a 40% rate payer (comes in form of a cash rebate via tax return, and is outside the SIPP wrapper). Effectively would have £55k

So ignoring the high rate relief, your cash position outside the SIPP is effectively enhanced by £5k, which is the basic rate tax relief.


I don’t understand this at all.
There is no legal way I know of to extract money out of a SIPP before the age of 55, and then only 25% is tax free. I don’t know what you mean by a ‘put through’ arrangement.
Unless you mean that you pay your £20k cash into the SIPP, buy the investments in the SIPP after you have received the tax relief, and then sell your unwrapped holdings. Described in that way it’s just a normal way of funding your pension, you just happen to have moved your unwrapped investments into the SIPP in the process. But you don’t need to think about these transactions in a coupled way at all, you could equally sell your unwrapped holdings, move £20k into the SIPP, and you’ve achieved the same outcome.
Either you are making something very simple unnecessarily complicated, or you are trying to do something complicated for a reason I don’t understand.

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Re: Extracting Basic Rate Tax Relief to outside SIPP wrapper/ Put-through transactions

#281626

Postby mc2fool » February 1st, 2020, 5:48 pm

shootingstar wrote:So ignoring the high rate relief, your cash position outside the SIPP is effectively enhanced by £5k, which is the basic rate tax relief.

Well I suppose that's a way of looking at it, albeit hardly a useful, let alone an accurate, one, relying solely on artificial compartmentalisation and the arranged coincidence of numbers in your example. I'd suggest a much better, and altogether more accurate way of viewing it would be:

At the start you have £45K of liquid unconstrained wealth that you could readily use and spend in short order, should you wish or need. Whether it is in shares or cash is irrelevant (unless some is in term deposits of course).

You intend to transfer £20K of this liquid unconstrained wealth into a SIPP. This will (not just "effectively" but in in every real sense) reduce your liquid unconstrained wealth by £20K and put that £20K out of reach to you until you are 55 (rises to 57 in 2028).

The quid pro quo for this, of course, is that the taxman will (after a while) bung an additional £5K into the SIPP ... which you also cannot access until you are 55/57.

So, your end position is increased wealth but consisting of a notably smaller pot of £25K of liquid unconstrained wealth and a £25K SIPP that's constrained.

Whether the above is a good idea or not in itself will depend entirely on your personal situation, but there is no way that moving money into your SIPP can enhance your position outside it, or, as others have said, of getting the basic rate relief -- or indeed, anything -- out before you're 55/57.

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Re: Extracting Basic Rate Tax Relief to outside SIPP wrapper/ Put-through transactions

#283802

Postby Gan020 » February 12th, 2020, 2:52 pm

I thought I'd clarify the "put through" arrangement. It is a term used by brokers and has a specific meaning.

It's easiest to start with explaining Bed & ISA or Bed & SIPP. You have say £20k of shares outside of a tax wrapper and have not used your ISA allowance
or contributed to your SIPP. You move then into an ISA or SIPP. This will cost you 0.5% stamp duty and the MM will take a little on the spread to do the transaction. (but far less than if you did the sale and buy-back yourself in two transactions)

"Put through" is exactly the same except you've already filled up your for example your ISA allowance but have cash in there from previous years or an accumulation of cash from mdividends. Your shares outside the tax wrapper are sold and then bought back with the cash in your ISA or SIPP account. You still have to pay the 0.5% stamp duty and it appears the MM will take a slightly higher amount of money in the spread to do the transaction, but still significantly less than doing it yourself.

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Re: Extracting Basic Rate Tax Relief to outside SIPP wrapper/ Put-through transactions

#283822

Postby Chrysalis » February 12th, 2020, 4:22 pm

Gan020 wrote:I thought I'd clarify the "put through" arrangement. It is a term used by brokers and has a specific meaning.

It's easiest to start with explaining Bed & ISA or Bed & SIPP. You have say £20k of shares outside of a tax wrapper and have not used your ISA allowance
or contributed to your SIPP. You move then into an ISA or SIPP. This will cost you 0.5% stamp duty and the MM will take a little on the spread to do the transaction. (but far less than if you did the sale and buy-back yourself in two transactions)

"Put through" is exactly the same except you've already filled up your for example your ISA allowance but have cash in there from previous years or an accumulation of cash from mdividends. Your shares outside the tax wrapper are sold and then bought back with the cash in your ISA or SIPP account. You still have to pay the 0.5% stamp duty and it appears the MM will take a slightly higher amount of money in the spread to do the transaction, but still significantly less than doing it yourself.


Thanks for that explanation. I still don’t see how in the OPs case this would extract the basic rate relief. Or be in anyway different from the standard way of doing it, other than perhaps saving one lot of stamp duty. I had hoped the OP would come back and explain...

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Re: Extracting Basic Rate Tax Relief to outside SIPP wrapper/ Put-through transactions

#283834

Postby Laughton » February 12th, 2020, 5:13 pm

Going back to the OP and his question:

"is there anything legally saying that basic rate relief must remain inside the wrapper?"

The answer is - YES. Because that's the way the system has been designed.

Your suggested "wheeze" doesn't achieve what you want. You end up with £25,000 worth of shares in your SIPP which you already had (£20,000 contribution plus £5,000 rebate) and £25,000 outside your SIPP (assuming you sell those shares) which you also already had.

Why not think about a salary sacrifice contribution from your employer - big saving on NI for both of you (that's even more of a benefit if you're employed by your own company).

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Re: Extracting Basic Rate Tax Relief to outside SIPP wrapper/ Put-through transactions

#284703

Postby shootingstar » February 16th, 2020, 12:28 pm

thank you everybody for your responses. First of all, I didn't mean to confuse anyone if that's what I have done. I was merely hoping to challenge my own thinking around this. it is great there is a forum like this where ideas can be shared

I have actually been to see an advisor recently on my plans. They were not actually able to advise me on what I am thinking about doing and not even really familiar with put-through transactions.

I admit what I am thinking of doing is relatively complex but to double clarify what i am contemplating, the reason I am thinking about doing the strategy previously outlined centres around trying to maximise tax relief (get effective tax relief over 90%) by combining the tax reliefs available on SIPPs and Venture capital Trusts. I originally came across this in a Times article a long time ago, on how to get 90% tax relief: https://www.thetimes.co.uk/article/how- ... 59m6rmwdvh This referred to a fundraising that Octopus were doing for one of their VCTs over 10 years ago

So to clarify my full plan as a higher rate tax payer who has carryover relief to use in terms of pension contributions is as follows;

1) Assuming you have carryover relief from prior tax years, you put money into a SIPP e.g £20k and receive tax relief (partly in the SIPP itself £5k, partly via tax return outside of the SIPP wrapper another £5k assuming you are a higher rate payer at 40%)

2) the grossed up money in the SIPP after the basic tax relief is applied (£25k) is used to buy assets held in your own name outside the SIPP e.g. ordinary shares or index funds. This could be done via a connected party transaction but I am looking to do it via a “put-through” arrangement (these shares outside the wrapper in my name are sold to a market maker initially and then the SIPP buys the same shares from the market maker, it's an 'arms lengths' transaction). This results in a cash position outside of the SIPP equal to the money that had been grossed up in the SIPP wrapper (£25k) –effectively as I see it the basic rate tax relief is extracted from the SIPP

3) that £25k cash position outside of the SIPP is then used to invest in a VCT or portfolio of several VCTs providing 30% additional tax relief (£7.5k). In the times article i mentioned above the plan originally marketed by the company involved (Octopus) was to invest in a lower risk type of VCT where the emphasis was more or less on preserving capital. These lower risk VCTs are no longer really allowed but it is still possible to find decent VCTs with well established profitable companies inside them

4) after 5 years the company involved (Octopus) were proposing that their Titan converted to an investment trust to enable better liquidity This didn't happen in practice) though the idea was then that the SIPP would receive the investment trust in specie which qualifies for further tax relief. In practice I think this part could be done in a different manner e.g. just sell the VCT at a hopefully decent price (5% discount to NAV in a VCT share buyback) and put the proceeds into your SIPP, Qualifying for more tax relief potentially after 5 years. Or just recycle into another VCTs for an additional 30% relief

So totally ignoring stage 4, the maths is:
From an initial contribution of £20k you have received total tax relief of £5k +£5k +£7.5k = £17.5k (87.5% relief)
Probably you will get a 5% tax free yield on the £25k VCT investment also, so that’s another £1.25k in year 1 = £18.75k (94% effective relief)

Initial Situation
20k cash
25k investments in index funds or shares
=£45k (all liquid assets)

Final Situation
£25k SIPP (includes basic rate relief, invested in index funds or shares previously held outside the SIPP)
£25K VCTs
£7.5k cash inflow from tax relief on VCTs
£5k higher rate relief from initial SIPP contribution of £20k
£1.25k VCT dividend Year 1
= £63.75k (only £12.5k immediately liquid, but £25k in VCTs accessible after 5 years -assuming they hold their value in terms of ending NAV, plus you would also get tax free dividends from the VCT over year 1 -5
Valuation uplift = £18.75k

so you sacrifice quite a lot of liquidity immediately, but the tax relief achieved is interesting.

Does anyone have any final thoughts on this?! hope i haven't upset anyone!


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