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Section 554W ITEPA 2003

This example illustrates the rules of Section 554W discussed in EIM45635.

Assume the following facts.

• A is a member of an EFRBS (not registered).
• A has a lump sum entitlement of 50% of the fund.
• A’s rights accrued, in part, before 6 April 2011.
• A’s rights under the scheme are valued in total at £1 million.
• On 1 March 2012, A receives a lump sum of £500,000 wholly out of these rights.

»Ê¹ÚÌåÓýapp payment of this lump sum is a relevant step within Section 554C.

»Ê¹ÚÌåÓýapp rights out of which the lump sum is paid accrued, in part, before 6 April 2011. So, an apportionment is needed.

»Ê¹ÚÌåÓýapp lump sum needs to be apportioned between:

• A’s pre-6 April 2011 lump sum rights, and
• A’s other rights.

A’s pre-6 April 2011 rights consist of:

• contributions made before 6 April 2011, and
• growth on those contributions up to the time when the lump sum is paid.

Recall that A is not entitled to take 100% of the fund as a lump sum. »Ê¹ÚÌåÓýapprefore, A’s ‘pre 6 April 2011 rightsâ€� include but are wider than A’s ‘pre-6 April lump sum rightsâ€�.

A’s post-5 April 2011 rights consist of:

• contributions made after 5 April 2011, and
• growth on those contributions up to the time when the lump sum is paid.

Assume that, on a just and reasonable basis:

• A’s pre-6 April 2011 rights are valued at £800,000, and
• A’s post-5 April 2011 rights are valued at £200,000.

A has a lump sum entitlement of 50% of the fund, therefore A’s pre-6 April 2011 lump sum rights are valued, on a just and reasonable basis, at 50% x £800,000 = £400,000.

So, Section 554W treats the payment of the lump sum as two separate relevant steps:

• one in relation to the lump sum so far as paid out of A’s pre-6 April 2011 lump sum rights, and
• one in relation to the lump sum so far as paid out of A’s other rights.

»Ê¹ÚÌåÓýapp former step is valued at £400,000. Section 554W stops it giving rise to Part 7A income. However, it is still potentially subject to charge under Section 394 ITEPA 2003 see EIM15010 onwards.

»Ê¹ÚÌåÓýapp latter step is valued at £100,000. As far as Section 554W is concerned, there is nothing to stop it giving rise to Part 7A income.