Tax provisions in connection with the Dormant Assets Scheme
Published 15 March 2023
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This publication is available at https://www.gov.uk/government/publications/further-tax-provisions-for-income-tax-and-inheritance-tax-in-connection-with-the-dormant-assets-scheme/tax-provisions-in-connection-with-the-dormant-assets-scheme
Who is likely to be affected
Individuals who have identified pensions and other assets that have been transferred into the Dormant Assets Scheme. It also affects personal representatives and beneficiaries of deceased individuals if their assets were considered dormant and transferred to an authorised reclaim fund.
General description of the measure
This measure ensures that payments from an authorised reclaim fund in respect of a pension asset are treated for the purposes of Income Tax as if they were from the pension asset that was initially transferred.
The legislation also includes a provision which will ensure that where an asset has been transferred to an authorised reclaim fund and its owner was alive at the time of transfer but subsequently dies before the asset has been reclaimed, the owner will be treated for Inheritance Tax (IHT) purposes as still owning the original asset.
Policy objective
This measure will ensure that the act of reclaiming pension assets from an authorised reclaim fund are tax neutral for Income Tax purposes. This will provide certainty that the tax treatment remains constant for all those involved and give pension institutions the confidence that they can return a reclaimed asset to a beneficiary as if it were the original pension.
For IHT purposes, this measure will ensure that the amount in an authorised reclaim fund will be treated in the same way as the original asset in circumstances where the original owner is alive at the time of transfer but subsequently dies before the asset has been reclaimed.
Background to the measure
The existing Dormant Assets Scheme has been in operation since 2011 and enables banks and building societies to channel funds from dormant bank and building society accounts towards good causes. In 2021, following a consultation, the government announced its intention to expand the scheme to include certain assets from the pensions, insurance, investment and wealth management and securities sectors to be used for public benefit, whilst protecting the original asset owners’ legal right to reclaim the amount that would be due to them had a transfer into the scheme not occurred.
The main features of the expanded Dormant Assets Scheme, introduced by the Dormant Assets Act 2022, mirror those of the original scheme. Once an institution (such as a pension scheme) transfers an asset to an authorised reclaim fund, any liability pertaining to the transfer, including any liability to meet reclaims, is extinguished and the reclaim fund takes on the liability.
At the Tax Policies and Consultations update on 23 March 2021 the government announced its intention to amend tax legislation to assist with the expansion of the Dormant Assets Scheme. Legislation was introduced in Finance Act 2022 which amended Finance Act 2008 to reflect the expansion of the scheme by the Dormant Assets Act 2022. The Taxation of Capital Gains Act 1992 was also amended to apply to the wider range of assets now included in the scheme.
Detailed proposal
Operative date
The revisions enacted by the measure to Part 4 of Finance Act 2004 will have effect on and after the date of Royal Assent of Spring Finance Bill 2023. The revisions to Inheritance Tax Act 1984 will be backdated to have effect from 6 June 2022.
Current law
Section 1 of Dormant Asset (DA) Act 2022 sets out the expanded scheme and covers the relationship with the Dormant Bank and Building Society Accounts Act 2008.
Sections 5, 6 and 7 of DA Act 2022 sets out the transfer of pension assets to the Dormant Assets Scheme/Reclaim Fund, what are eligible pension benefits that can be transferred and the meaning of dormant in respect of pension assets.
Section 5(1) of DA Act 2022 sets out that the section applies where a pension scheme transfers an eligible asset to an authorised reclaim fund and the fund consents to the transfer. Section 5(2) and 5(3) provides for the transfer of legal liability from the pension institution to an authorised reclaim fund for the different types of assets set out in Section 6(1). Section 5(4) and 5(5) set out what is a ‘pension institution’ for the purposes of this act.
Sections 2 (Transfer of eligible insurance proceeds to reclaim fund), 8 (Transfer of eligible amount owing by virtue of a collective scheme investment to reclaim fund), 12 (Transfer of eligible client money to reclaim fund) and 14 (Transfer of eligible proceeds or distribution to reclaim fund) of the DA Act 2022 set out and applies to transfers of assets other than pension assets.
Proposed revisions
A new section 274ZB will be added to Part 4 of Finance Act 2004 which will mean that for the purposes of Income Tax, the amount paid out of the Dormant Asset Scheme will be treated as the same as the rights held against the original pension institution, with the same characteristics for tax purposes.
A new section 159A will be added to Inheritance Tax Act 1984 which will mean that, where the original asset owner dies following a transfer of assets to an authorised reclaim fund, and no claim is made prior to their death, they will be treated as if they still owned those original assets for IHT purposes. This will confirm that the treatment of certain types of assets for the purposes of the IHT legislation is preserved.
Summary of impacts
Exchequer impact (£m)
| 2022 to 2023 | 2023 to 2024 | 2024 to 2025 | 2025 to 2026 | 2026 to 2027 | 2027 to 2028 |
|---|---|---|---|---|---|
| Nil | Negligible | Negligible | Negligible | Negligible | Negligible |
This measure is expected to have a negligible impact on the Exchequer.
Economic impact
This measure is not expected to have any significant economic impacts.
Impact on individuals, households and families
This measure will impact individuals who wish to reclaim assets that have been transferred to the Dormant Assets Scheme. It will make sure that the reclaimed asset will be treated as if it was the original asset for IHT purposes where the owner was alive at the time of transfer but dies before the asset is reclaimed. For Income Tax, it will ensure that payments from an authorised reclaim fund are treated as if they were from the original pension asset that was initially transferred.
This will provide certainty that the tax treatment of reclaimed assets remains constant for all those involved.
The measure is not expected to impact on family formation, stability or breakdown.
This measure is expected overall to have no impact on individuals’ experience of dealing with HMRC as the change doesn’t change any processes or tax administration obligations.
Equalities impacts
It is not expected that there will be adverse effects on any group sharing protected characteristics.
Impact on business including civil society organisations
There is no impact on businesses as this measure only affects individuals.
This measure is not expected to impact civil society organisations.
Operational impact (£m) (HMRC or other)
HM Revenue and Customs will not incur any costs implementing this change.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
This measure will be kept under review through communications with affected taxpayer groups.
Further advice
If you have any questions about this change, please contact the Pensions Policy Team on at email: [email protected].