Millions of euro in tax avoided by high wealth individuals through two gaping loopholes on personal retirement plans

MILLIONS of euro in tax was being avoided by high wealth individuals as part of a tax loophole on personal retirement plans.

The Personal Retirement Savings Accounts (PRSAs) scheme and a separate scheme known as Retirement Annuity Contracts (RACs) both had to be shut in the last budget amid warnings from the Revenue Commissioners.

Internal documents have revealed how the schemes were being abused by “high net-worth individuals” to pass on their assets tax-free after death.

A Departmental submission to Minister Michael Noonan explained how the PRSA pension plan was being used for “tax-planning purposes” because of a loophole in the legislation.

Effectively, the wealthy individuals involved were never actually cashing in the scheme after they retired from their jobs.

The loophole meant that people were benefitting from tax reliefs on their pension contributions while employed and then later avoiding paying inheritance tax.

The submission, obtained following an FOI request, explained: “Minister, this proposal is to amend the Finance Act to counter a tax planning activity by high net worth individuals whereby individuals don’t draw down their PRSA by the time they are 75 so as to facilitate a tax-free transfer to their spouse upon their death.

“This activity would seem to fly in the face of the original intention of PRSAs.”

The new change meant the pension plan would automatically crystallise when the person reached the age of 75, and would have to be drawn down.

The PRSA scheme had been introduced in 2002 as a low-cost private pension savings plan, particularly for the self-employed.

However, in the ensuing years, it had become particularly popular among high wealth individuals.

This was explained by a loophole in the original wording, which had been seized on by tax advisers as a mechanism for avoiding tax.

The submission said: “The wording is open to the interpretation that, whilst a PRSA owner who wishes to take benefits from his or her PRSA must do so by their 75^th birthday at the latest, there is no compulsion to take benefits at that age (or indeed any age).

“While this may seem to fly in the face of the whole raison d’etre for pension savings — i.e. to provide an income in retirement — for those with substantial pension assets it can provide significant tax planning opportunities.”

The submission explained how it was then possible to pass the fund tax-free to a surviving spouse or estate without any further consequences.

In one example, they describe how through careful planning, a person with a pension pot worth €2.5 million could avoid €200,000 in tax.

The submission explained that tax relief was allowed on pension contributions because people would eventually end up paying tax on the money in retirement.

“This principle is being frustrated by the tax planning opportunities,” it said.

Speaking points on shutting the loophole were prepared for Minister Michael Noonan for inclusion in his budget speech.

In one memo, it was explained how a draft was rewritten because officials wanted a “‘softening’ [of] the avoidance aspect”.

Another shorter version was then prepared, which was described as having a “better chance of going into the speech ‘undisturbed'”.

Ultimately, the changes were not mentioned during the Budget 2017 speech but did feature in the Finance Bill.

Subsequently, a loophole in a second scheme known as Retirement Annuity Contracts (RACs) also had to be shut after it was discovered they were also being used for “tax planning purposes”.

The internal correspondence explained: “RACs are a type of insurance contract approved by Revenue to provide retirement benefits, mainly for the self-employed.

“Where retirement benefits are not taken from an RAC, there is no Benefit Crystallisation Event and, in addition, on death, the proceeds go tax free to the individual’s estate.”

In a statement, the Revenue Commissioners said: “Revenue has a broad range of programs in place that are aimed at identifying and tackling tax avoidance in all its forms, including aggressive tax planning and unintended use of legislation.

“Revenue continues to identify such arrangements and challenge them, and where appropriate, recommends strengthening legislation to the Department of Finance. Tax policy and tax legislation are matters for the Minister for Finance and the government.”

They said the changes introduced in the Finance Act meant that the two pension schemes would now automatically vest at age 75.

They said: “The estimation of a cost of tax foregone from the owners of such RACs or PRSAs would require, for example, application of (unknown) earlier retirement dates, valuations of assets etc, and is not a matter for Revenue.”

Documents are large so are in two parts: