Scheme member pays penalty tax charge

In Harry Thorpe v Revenue & Customs Commissioners, an attempt by the trustee and only remaining scheme member to take all remaining scheme assets as a tax-free lump sum was rejected by the special commissioner.

Beneficiaries of a trust may wind it up and share out the assets provided all possible beneficiaries are adults of sound mind and they all agree to this, in accordance with the 1841 case of Saunders v Vautier.

Thorpe claimed he had the right to wind up the scheme in reliance on that case and to pay all the assets of the scheme to himself tax free.

However, the special commissioner pointed out the principle in Saunders v Vautier could not be applied if there were potential beneficiaries – even if not yet in existence – who had not consented.

Thorpe’s decision to pay himself all the scheme assets was not one that could be reversed. He was therefore liable for the double tax charge – the penalty for loss of tax approval and the tax charge on the withdrawal from an unapproved scheme.

Law firm Pinsent Masons said: "This is an example of a scheme member trying to be too clever. He thought he could extend an old legal trust principle to a modern pension scheme. This would have allowed him to take all the scheme assets as a tax-free lump sum. Unsurprisingly, HMRC disagreed."